During the mortgage process, we often run into some confusion about the difference between an appraisal and a home inspection. While it is true that these terms are interconnected, they are not interchangeable and, in fact, they represent two entirely different points within the process.
In short, an appraisal has to do with the value of a property while an inspection deals with the condition of a property. When you are selling a home, an appraisal can help you determine fair market value for your home and set the price accordingly. When an appraisal is required for a home you are purchasing, it is to help your lender mitigate the risk of financial loss in case your mortgage goes into default in the future.
Appraisals can be broken down into three categories:
Sales Data Report: This type of appraisal does not include a physical inspection of the property, rather it is based on a review of current market and sales data.
Limited-Restricted Appraisal: This appraisal involves an assessment of the exterior of the property and is commonly referred to as a “drive by” appraisal. This will include more detail about the property and the neighbourhood in comparison with a sales data report.
Full Internal Appraisal: This is the most comprehensive type of appraisal and includes:
- Both an interior and exterior assessment of the property
- Details about the neighbourhood.
- Comparative sales data
When you are applying for a mortgage, a full internal appraisal is almost always required. The appraiser will generally take a ‘cost approach’ in determining the value of the home, which means they will look at the land value as well as what it would cost to build a home with the exact features and specifications of your current home.
An inspection, on the other hand, always involves a physical examination of your home to look for functional and safety issues. The inspection will tell you what you should consider fixing before putting your home up for sale, or what repairs will be imminent when you purchase a new home. Your Realtor can sometimes use an inspection as leverage to knock down the price of a home you are considering purchasing if significant repairs are required.
Who Sets Them Up?
Your Realtor is usually the one to set up your home inspection. When you apply for a mortgage, most lenders have an approved list of appraisers they will work with during the mortgage process. If you are working with a Broker, they will have access to this list and should be able to facilitate your appraisal on your behalf.
Coordinating between your Realtor, home inspector, appraiser and mortgage lender can be difficult. Working with a Broker can help save you time by being your liaison between all of the industry professionals involved in the mortgage process. Contact us today for a free mortgage consultation!