Q&A / Buying a home
What’s the difference between a home inspection and an appraisal?
Short answer
The inspection checks the home’s condition, and it protects you. The appraisal checks the home’s value, and it protects the lender. They answer different questions, and you need both.
What is a home inspection?
You hire a licensed home inspector to go through the house from top to bottom. They look at the roof, foundation, heating and cooling, plumbing, electrical panel, water heater, windows and attic.
It usually takes a few hours. Afterward you get a report with photos that shows what’s working, what’s worn out and what needs attention. You pay for the inspection, and you choose the inspector.
What doesn’t a standard inspection cover?
Some things are usually extra, and you have to ask for them. Common add-ons include radon testing, a check for termites and other wood-destroying insects, a camera scope of the sewer line, and well or septic checks for homes that have them. Radon in particular is worth asking about in Indiana.
What is an appraisal?
The appraisal is ordered by your lender, and the cost is usually part of your closing costs. An appraiser looks at the house and compares it with similar homes that recently sold nearby. Then they decide what it’s worth.
Lenders base your loan on the appraised value, not on what you agreed to pay. That’s how the bank makes sure it isn’t lending more than the house is worth.
What happens if the appraisal comes in low?
Say you offer $400,000 and the house appraises at $385,000. The lender bases your loan on $385,000. That leaves a $15,000 gap.
From there, you have a few options. The seller can lower the price. You can pay the difference in cash. You and the seller can split it. Or, if your contract has an appraisal contingency, you can back out and keep your earnest money.
Can a house pass one and fail the other?
Yes, because they’re answering different questions. A house can be worth every penny of its price and still need a new roof. Another house can be in great shape and still be priced too high. The inspection tells you what you’re buying. The appraisal tells the bank what it’s worth.
What I tell my clients
Go to the inspection, or at least show up for the last half hour and walk the house with the inspector. You’ll learn more about your new home in an hour than you would in a year of living there. And remember that every house has items on the report, even new construction. Focus on safety issues and big-ticket repairs, not the small stuff.
Want the deeper dive?
Read The Home Inspection: A Buyer’s Guide for Hamilton County. It covers which extra tests are worth it and how to negotiate repairs without weakening your position.
Words you’ll hear
- Comps
- Short for comparable sales. Similar homes nearby that sold recently, used to judge value.
- Appraisal gap
- The difference between the price you agreed to and what the house appraised for.
- Inspection period
- The window of time in your contract to inspect the house and decide what to do about what you find.
Have a question that isn’t here?
Send it to me. I’ll give you a straight answer, and if other people are wondering the same thing, it might become the next page in this Q&A.
This is general information to help you understand the process. It isn’t legal or financial advice. Your contract, your lender and your agent have the final word on your situation.