USA: home inspection or appraisal, and who gets the appraisal report

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Kooky

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Two people may walk through a home between the signing of a purchase agreement and closing in the United States, and they are there for different reasons. One is an appraiser, whose report gives an opinion of what the property is worth. The other is a home inspector, whose report describes the state the building is in. The two documents are easy to confuse, and the federal agencies that back home loans have gone to some length to keep them apart: the Department of Housing and Urban Development (HUD) publishes a form whose whole purpose is to tell buyers that one does not replace the other, and the Department of Veterans Affairs (VA) says the same of its own appraisal in a single sentence.

This guide sets out what each report is for under federal sources, who arranges and pays for each, what HUD's notice says on a loan insured by the Federal Housing Administration (FHA), how a VA appraisal is assigned, what Regulation B gives a loan applicant by way of copies, and what the Environmental Protection Agency (EPA) says about radon testing when a home changes hands. State rules on inspectors and on purchase contracts are not covered here.

Regulation B, 12 CFR 1002.14, as published by the Consumer Financial Protection Bureau; EPA, A Citizen's Guide to Radon, January 2009.

Two reports that answer two different questions

The Consumer Financial Protection Bureau (CFPB) defines an appraisal as "a written document that shows an opinion of how much a property is worth". In its consumer guidance, last reviewed on 4 September 2020, the Bureau describes it as an independent assessment of value that notes what makes the property valuable and how it compares with nearby properties. The question an appraisal answers is therefore about money: is the home worth what the loan assumes it is worth?

A home inspection answers a question about the building. HUD's form HUD-92564-CN, in the edition revised on 9 February 2023, says the purpose of an inspection is to inform and educate the buyer about the property before a financial commitment is made. According to the form, a qualified inspector, for a fee, evaluates the physical condition of the home, estimates the remaining useful life of its major systems, equipment, structure and finishes, and identifies items that need repair or replacement.

The reports also serve different readers. HUD's form says an appraisal is required to estimate the home's value for the lender. The inspection, on the other hand, is described throughout the form as something done for the buyer and at the buyer's request. An earlier edition of the same form put the point more sharply: the appraisal estimates market value and checks that the home meets minimum property standards, and it does not evaluate the condition of the home in order to protect the buyer.

What a home inspection is meant to tell a buyer

HUD's form gives the inspection three jobs. The first is a description of physical condition. The second is an estimate of how much useful life is left in the home's major systems, its equipment, its structure and its finishes. The third is a list of what needs repairing or replacing. None of the three is a statement of value, and that is the reason an inspection report normally sits outside the copy rule described later: the official interpretations of Regulation B list a property inspection report that does not estimate value among the documents that are not valuations.

The form also treats the inspection as a source of answers on particular hazards. Under the heading "Radon Gas Testing and Other Health or Safety Issues", it tells buyers they can ask the inspector about asbestos, lead paint or urea formaldehyde insulation. The earlier edition of the form framed the same idea by agency: according to that edition, EPA recommends radon testing, HUD recommends health and safety testing, and the Department of Energy recommends energy efficiency testing.

On finding an inspector, the earlier edition suggested referrals, the listings of licensing authorities, local advertisements and the American Society of Home Inspectors. The 2023 edition keeps a section headed "How to Find an Inspector". Neither edition names a price, and no fee figure for inspections was found on the federal pages read for this guide.

Who orders each report, and who pays

The inspection is the buyer's to arrange. HUD's form states that the buyer must arrange it and adds, in plain words, that "FHA does not perform home inspections". The acknowledgment printed on the earlier edition described a home inspection as voluntary, to be requested and scheduled by the buyer.

The appraisal belongs to the loan file. On a VA loan, the VA's description of the buying process places it in the loan processing step: the lender orders a VA appraisal while it works through the applicant's credit and income information. The CFPB's guidance says a lender may need a new appraisal when a home is bought or refinanced, and that it may also use other ways to check a home's value.

As for cost, the CFPB says the lender may require the applicant to pay for the appraisal. Regulation B draws a line here that matters later. Under paragraph (a)(3) of 12 CFR 1002.14, a creditor may require a reasonable fee to reimburse the cost of the appraisal, unless another law provides otherwise, but it may not charge for providing a copy of it. The fee, where there is one, pays for the work; the copy is free.

For VA loans, the VA's Construction and Valuation page refers lenders and appraisers to a state-by-state list of appraisal fees and timeliness schedules, which it describes as specific to a locality. The amounts are in that list and not on the page itself, so no VA appraisal fee is quoted here.

What HUD's inspection notice says on an FHA loan

The form is titled "For Your Protection: Get a Home Inspection" and carries the number HUD-92564-CN, under OMB approval number 2502-0538. The edition revised on 9 February 2023 prints an expiry date of 31 July 2025 for that approval; the edition before it printed 30 June 2021. Whether a newer edition has been issued since was not confirmed for this guide, so what follows describes the two editions that were read.

The 2023 edition is organised under six headings: "Why You Need a Home Inspection", "Be an Informed Buyer", "What is Included in the Inspection?", "How to Find an Inspector", "Appraisals are NOT Home Inspections!" and "Radon Gas Testing and Other Health or Safety Issues". Its central message is the one in the fifth heading, and the sentences beneath it set a limit on what the federal insurer stands behind.

On what an FHA appraisal looks at, the two editions differ in detail. The earlier one gave the appraisal two purposes: to estimate market value, and to check that the home meets minimum property standards. The 2023 edition gives one reason only, which is to estimate the home's value for the lender. Neither edition lists what the property standards are. HUD sets them out in its single family housing policy handbook, which was not read for this guide, so the content of those standards is left as an open point here.

The form also deals with timing. The 2023 edition says that a buyer who asks for an inspection early may be able to make the purchase contract contingent on its results. The earlier edition said the inspection could take place before or after the contract is signed, recommended doing it as soon as possible, and noted that a buyer may be able to negotiate a contract that depends on the outcome. Whether a given contract contains such a contingency, and what it allows, is a matter of that contract and of state law.

How a VA appraisal is ordered and what it is not

The VA describes the purchase with a VA-backed loan in seven steps, in this order:

1. Find a real estate professional to work with.
2. Find a lender that takes part in the VA programme.
3. Get a Certificate of Eligibility, which the VA says verifies to the lender that the applicant meets the eligibility requirements for a VA loan.
4. Find a home and sign a purchase agreement.
5. Apply for the VA loan with the lender.
6. Loan processing, during which the lender orders the VA appraisal.
7. Closing, conducted by a title company, an attorney or one of the lender's own representatives, as the lender selects.

Two of those steps bear on this subject. At step four, the VA says the buyer should make sure the purchase agreement contains a "VA Option Clause". The sample wording on the VA's page begins by providing that the purchaser shall not incur any penalty by forfeiture of earnest money; the page says the agreement may also let the buyer leave the contract without penalty if a VA loan cannot be obtained. The full sample clause continues beyond the part read for this guide.

At step six comes the appraisal. The VA's page makes four points about it. The lender orders it. The appraiser is licensed and is not a VA employee. The lender cannot ask for a specific appraiser, because assignments are made on a rotating basis. And the result is narrow in what it claims: in the VA's words, "VA's appraisal is not a home inspection or a guaranty of value." The page calls it an estimate of market value on the date of the inspection, nothing more.

The VA adds that the appraiser will look for obviously needed repairs, and then says that the VA does not guarantee the condition of the home. Once the appraisal is back, the lender reviews it with the credit, income and asset documents and decides whether to grant the loan.

The VA's Construction and Valuation page also points to a state-by-state list of the VA's wood-destroying insect requirements. The page read for this guide does not set out those requirements, nor the VA's minimum property requirements, so they are not described here.

The right to a copy of the appraisal

The right comes from Regulation B, at 12 CFR 1002.14. The CFPB publishes the regulation with its official interpretations. Paragraph (a)(1) requires a creditor to give an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.

Each term has a defined reach. A dwelling, under paragraph (b)(2), is a residential structure containing one to four units, whether or not it is attached to real property. The definition includes an individual condominium or cooperative unit and a manufactured home, and it excludes motor vehicles. The rule is not limited to loans that close: paragraph (a)(4) says the duty to provide copies applies whether credit is extended or denied, and whether the application is incomplete or withdrawn.

The applicant is told about the right early. Under paragraph (a)(2), the creditor must mail or deliver a written notice of the right to receive a copy of all written appraisals not later than the third business day after it receives the application. Where an application did not start as a first-lien loan and the creditor later determines that it will be one, the notice is due by the third business day after that determination.

Copies may arrive on paper or on screen. Paragraph (a)(5) allows electronic delivery, subject to the consumer consent and other requirements of the E-Sign Act.

Deadlines, waivers and the 30-day rule

The timing rule in paragraph (a)(1) has two limbs, and the earlier of the two governs. A copy must be provided promptly upon completion of the appraisal or valuation, or three business days before consummation for closed-end credit (account opening, for open-end credit), whichever is earlier. Consummation is defined in paragraph (b)(1) as the time a consumer becomes contractually obligated on a closed-end credit transaction.

The CFPB's consumer guidance puts the same rule in everyday terms: the applicant should receive copies soon after the lender has them in complete form, and no later than three days before closing. The regulation's own wording is three business days, and it is the regulation that binds. The definition of a business day for this purpose was not read for this guide.

"Promptly" is not a fixed number of days. The official interpretations say it depends on the facts and circumstances, and they give examples on both sides. Sending a copy about a week after the creditor has accepted the appraisal, with enough time left before consummation, satisfies the rule; so does sending a revised appraisal about a week after it is completed, or an automated valuation model report about a week after it is received. Holding a completed appraisal until just before a scheduled closing does not, and nor does keeping an automated valuation report for about 30 days while a second appraisal is finished.

An applicant may waive the timing requirement and agree to receive copies at or before consummation or account opening, unless the law prohibits it. The waiver itself has a deadline: it must generally be obtained at least three business days before consummation or account opening. A waiver given later than that is valid in one case only, where the copy concerned differs from an earlier version by clerical changes alone and the applicant received that earlier version three or more business days before consummation.

A waiver changes when the copy arrives; it does not remove the right to it. If the applicant has waived the timing and the transaction is then not consummated, or the account is not opened, the creditor must provide the copies no later than 30 days after it determines that this is the case.

A worked example, with assumed dates. A buyer waives the timing requirement on a purchase loan. On 3 March 2026 the creditor determines that the loan will not be consummated. Counting 30 days from 3 March, 28 days bring the count to 31 March and the remaining two bring it to 2 April, so the copies are due no later than 2 April 2026.

What counts as a valuation under the rule

The rule reaches further than the report of a licensed appraiser. Paragraph (b)(3) defines a valuation as any estimate of the value of a dwelling developed in connection with an application for credit. The CFPB's official interpretations give lists on both sides of the line.

The interpretations also count as a valuation a report approved by a government-sponsored enterprise that describes an estimate of value produced by its proprietary method. On the other side, they leave out internal documents that merely restate a value already given to the applicant, and publicly available government statements of appraised value.

So where a lender relies on an automated model or a broker's opinion, the document that states the value is covered, and the applicant is entitled to a free copy of it on the same timetable.

Radon: what EPA advises when a home is bought

HUD's 2023 form carries a statement on radon in its last section: the Environmental Protection Agency and the Surgeon General recommend that all houses be tested for radon. The form refers buyers to the National Radon Information Line. The detail sits in EPA's own publications; the edition of A Citizen's Guide to Radon read for this guide is numbered EPA 402/K-09/001 and dated January 2009, and its figures are given here as of that edition.

EPA's action level is 4 pCi/L, in the unit the guide uses. At or above it, the guide's advice is to fix the home. The guide does not present the level as a line between safe and unsafe: it says no level of radon is safe, that levels below 4 pCi/L still carry some risk, and that a home with a reading between 2 and 4 pCi/L is one to consider fixing. For scale, the guide puts the average indoor level at about 1.3 pCi/L and the average outdoor level at about 0.4 pCi/L. It estimates that nearly one home in 15 in the United States has an elevated level, attributes about 21,000 lung cancer deaths a year to radon, and quotes the Surgeon General describing indoor radon as the second leading cause of lung cancer in the country.

Testing comes in two lengths. A short-term test runs from two to 90 days and a long-term test for more than 90 days. The guide sets conditions for the short kind. Windows and outside doors are kept closed as much as possible during the test, and for a test of two or three days they are closed at least 12 hours before it starts. The device goes on the lowest level of the home that is regularly lived in, in a room in frequent use other than a kitchen or bathroom, at least 20 inches above the floor and away from draughts, high heat, high humidity and exterior walls. Fans that bring in outside air are not run, and a two or three day test is not carried out during severe storms or high winds.

The guide speaks to both sides of a sale. A seller is advised to test before listing, keep the results and fix a high level before the home goes on the market; two short-term tests run side by side, four inches apart, can help decide whether a fix is needed. A buyer may want the test done by someone who is not involved in the sale, and the guide says a state radon office can supply a list of qualified testers. A do-it-yourself kit is the other route it describes. For a newly built home, the guide suggests asking the owner or builder whether radon-resistant features were included, and says every new home should be tested after occupancy.

A high reading is a repair item in EPA's account, not the end of a purchase. The guide says homes can generally be brought down to 2 pCi/L or below and that the cost is about the same as other common home repairs. An active system uses a vent pipe and a fan to draw radon from beneath the house and release it outside, and some systems cut levels by up to 99 per cent. Where a home was built with a passive system and still tests at or above 4 pCi/L, a qualified mitigator can add a fan to activate it, at a cost the January 2009 guide put at about US$300.

What happens when one report raises a problem

The two reports lead to different places when something goes wrong, because they belong to different relationships.

An appraisal is part of the lender's decision. The VA describes the sequence for its loans: the lender reviews the appraisal together with the credit, income and asset documents, and then decides whether to grant the loan. The VA's option clause exists for the buyer's side of that moment, since its sample wording protects the purchaser from forfeiting earnest money in the circumstances the clause describes. The copy rule gives the applicant the document on which the decision rests, at no charge and before consummation, and gives it even when the loan is denied or the application withdrawn.

An inspection is part of the buyer's own decision. HUD's form ties its usefulness to the calendar: asked for early, it may allow the purchase contract to be made contingent on the results. What the form is clear about is where the federal insurer stands once the sale has closed, which is outside the question of repairs altogether.

Lead paint appears once on HUD's form, as one of the things a buyer can ask an inspector about; the federal sources read for this guide add nothing further on it.

An appraisal tells the lender what the home is worth on one day. Only an inspection is meant to tell the buyer what condition it is in.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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