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Difference between a Home Loan
Appraisal and a Home Loan Inspection
Getting caught up in the vocabulary surrounding home loans? Well,
if this is your first home purchase, then you are not alone. Home
loan terms are bandied around and misinterpreted and sometimes it
is just plain confusing for the prospective home loan borrower.
Two of the terms that some people confuse as interchangeable are
“appraisal” and “inspection”. They are however, two very distinct
and different processes in the bigger home loan approval process
and really have nothing to do with one another. One is based on
purely a dollar figure amount while the other is based on
worthiness or soundness of the home in question. Both, however,
are necessities when applying for a home finance.
Home Appraisal as part of eligibility requirements for a home
loan
A home appraisal is a valuation. It is the dollar amount
determined by a qualified appraiser hired or contracted by the
bank or home finance company. In the case of the bank, the
appraiser may be an employee of the bank and in some
instances, the appraisal may be free.
In the case of the home finance broker, the appraisal report
is usually completed by an outside individual or company
contracted by the home finance company and paid for by the
potential borrower as part of his or her application for a
home loan.
The main reason an appraisal is ordered when applying for a
home loan is to attach a dollar value to the home comparing it
to similar homes in its neighborhood. The bank needs to be
assured the borrower has not inflated the home loan amount
required and the home finance company needs to assure its
private lenders, that the home loan warrants the amount being
financed.
When the appraiser comes to view the home on which home
finances will be secured, he may write his report based solely
on the outside of the home while others will view the inside
of the home as well. Some of the things an appraiser may
document are:
• the size of the lot
• the square footage of the home
• the existence of outside buildings such as garages and
stationary sheds
• the condition of the exterior and interior
• whether the basement is finished or not
• whether any of the home has been updated
• the age of the home and type of home
Lastly, if the appraisal is ordered as part of the application
process for a home loan, in most instances, the appraiser or
appraisal company will not give you a copy of the report. Even
though you may have paid for the report to be completed as
part of the home finance approval process, you are not
considered the company’s client. The bank or the home finance
company is the client and because of privacy laws, they
receive the only copy of the report. If for some reason you
feel justified in seeing the report, you will need to inquire
through the bank or household finance company.
Home Inspection as part of eligibility requirements for a home
loan
When requesting a home loan, a home inspection is usually
always mandated by the bank, especially when the amount of the
down payment is low and the home finance is a large
percentage. The home inspection specifically addresses the
worthiness of a home and the structural soundness. The
inspector will ascertain whether the structure of the home is
sound and whether the individual components such as plumbing,
electrical and materials meet code.
An inspection for the purpose of obtaining a home loan is
usually multi-facetted and may include the following:
• The outside of the building will be inspected for any
deterioration of the walls, crumbling of the stairs and
general condition of the foundation.
• The inspector will ask about the roof covering and if it has
ever been replaced and when. He will look for adequate eaves
trough and where the eaves are drained.
• The windows will be checked and again if new, when were they
replaced
• The inspector will walk the perimeter of the property
looking for any hazards or unsafe conditions. These might
include gas meters that are too close to driveways, wells that
are not capped and garages or outbuildings that appear unsafe.
• Inside the home, the inspector will inspect the basement for
any cracks or leaks in the foundation. Pictures will be taken
of problem areas.
• He will review whether the home uses circuit breakers or
whether it is uses fuses. In most areas now, the circuit
breakers are required as part of the electrical system.
• He will check the plumbing for old lead pipes, leaking of
the pipes and substantial rust in the pipes.
• The furnace will be checked and usually the inspector will
want to see the stamp from the last time the furnace was
serviced. If the furnace is gas, it will need to be checked
and stamped by a qualified technician for mono-dioxide
leakage.
• Throughout the home, the inspector will look for any
uncovered and open electrical hazards.
• Any updates to the house will be noted. Renovations such as
the finishing of the basement, kitchen remodeling, walls that
have been removed and added and bathroom updates will be
inspected for safety.
• The inspector will look for cracks in the walls and any
areas that seem to have deteriorated.
• The condition of the steps from the basement to the main
floor as well as any stair cases leading to a second floor of
the home.
In addition, some areas and states where termites and other
wood-damaging insects are a problem, the home loan lender will
expect the inspection to include inspecting for infestations
and previous damage. There may be other inspections as well,
that are mandated by the state or municipality as part of the
home loan process such as inspecting cisterns and well water
for contamination.
Ultimately, the home loan lender will want to know that the
home in question is insurable and that the home is worth the
money for which it is being purchased. Again, the home loan
lender wants to engage in a deal that is as least risky as
possible. Both of these benchmark tools, the appraisal and the
inspection are pieces of the home loan application process.
Either one of these reports can lead a home loan lender to
approve a home finance application or contrarily, decline the
home finance request. The appraisal and the inspection usually
protect all parties in the home loan application process. The
potential homeowner can rest assured he has chosen a sound and
fit home while at the same time the home loan lender is happy
because the home is worthy of the home loan investment.
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