Don’t confuse the home inspection with the inspection done by an appraiser who provides the appraisal report. Here’s the difference, quick and easy:
The Home Inspection
You hire and pay for the home inspection outside of the loan. The inspector goes through the house from roof to crawl space. He or she will point out every flaw, take a photo, and write a detailed report. It’s best to be present at the inspection so you can speak with the appraiser directly and ask questions.
Your Purchase Agreement should have a clause that allows you to cancel the sale without penalty if the inspection does not pass your personal standards.
Every house has its flaws. You need to decide which items are major enough to ask the seller to fix or provide you with a credit to fix yourself. It doesn’t make sense to ask for inconsequential items to be repaired.
You do not share the inspection report with your lender.
The appraisal determines the fair market value of the property. It protects you from paying too much and the lender from lending too much. The report is ordered and owned by the lender, but paid for by the borrower. The borrower receives a copy of the report, per federal lending law.
The lender may not collect money for the appraisal until after you have received the loan disclosures, a packet of information that includes the Loan Estimate. Then the lender will ask for payment of the appraisal by credit card.
The appraisal is paid for upfront, because if the value comes in too low or if you cancel the loan for any reason, the appraiser still must be paid. The lender does not cover that cost for you if you cancel the loan.
If the value comes in lower than the purchase price, you have three choices:
- You can have your Realtor renegotiate the price.
- You can pay the difference between the original sales price and the appraised value. (This will increase your cash to close.)
- You can cancel the sale.
You can also dispute the appraised value by providing different comparable properties with an explanation. This rarely works, but one time I saw the value raised in response to a customer dispute.
Neither you nor your loan officer chooses the appraiser. That is done by a neutral party who has no vested interest in the closing of the transaction. The idea behind this regulation is that neither the buyer nor the loan officer should have the ability to influence the value. That is why you cannot order your own appraisal report. No lender will give a report ordered by you one second of their time.
For more information about bogus appraised values, see my post here.
For 7 facts you should know about home appraisals, see my post here.
I welcome your comments and questions. (See Leave a Comment at the top of the post, under the title.)