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Why lenders may request surveys, inspections and appraisals

On Behalf of | Jul 1, 2024 | Real Estate

Aspiring home buyers often end up feeling overwhelmed and confused by real estate transactions. For example, people sometimes believe that what they offer as the purchase price for a property is what they pay at the closing table.

However, when they receive their initial settlement statement, they may experience sticker shock. The actual amount that they have to bring to the closing table can be far higher than the amount that they offered the seller. Closing costs are the reason for that discrepancy.

Most closings include costs for title services and a variety of other professional services. It is common for lenders to require not just an inspection but also an appraisal and possibly a survey. Why do many mortgage companies require three different reviews of a property prior to closing?

Professionals help mitigate financial risk

People buying real estate often let their excitement and eagerness overwhelm their better judgment. What they feel that a property is worth might not reflect what other buyers may offer for the property. They may also lack the experience necessary to identify costly issues with the property. Lenders rely on outside professional services as a means of protecting against financial losses when they fund a real estate transaction.

Appraisals, inspections, and surveys serve different purposes

At first glance, having an inspection, a survey and an appraisal may seem like overkill. Buyers might feel frustrated by the multiple costs passed on to them. However, appraisals, inspections and surveys technically all fulfill different purposes.

An appraisal helps establish what the fair market value of a property actually is. In other words, it is a professional estimate of what others might pay for the property based on current market conditions. Appraisals help protect lenders from scenarios in which over-eager buyers offer far more than the property is technically worth.

Inspections serve a similar but different purpose. They help identify defects that buyers and their real estate agents may have overlooked. In some cases, those property issues could substantially diminish the fair market value of the property and may increase the investments a buyer has to make for the home to be livable.

Finally, surveys help ensure that the property actually contains the land a buyer expects to own. Sometimes, years of complacency by current owners may have led to confusion about the placement of boundaries. The parcel may not include the land that buyers expect, which could diminish what the property is actually worth.

Each of these services helps validate the value of the property and protect against financial losses. Paying for an inspection, an appraisal and a survey can benefit a buyer and the financial institution funding a real estate transaction. Those who understand the different costs involved in a real estate closing may feel less frustrated about the closing costs that they need to cover.

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