Should you and could you Bypass your Appraisal?

That’s right, you read the subject line correctly!
It is possible in some cases to finance a home without an appraisal.  Here are some of the pros and cons in doing so.

Although it has been known by mortgage lenders, Realtors, and fellow professionals in the industry, the average home buyer is starting to learn that on some occasions, mortgage financing can be completed without the lender requiring an appraisal. After the housing crisis occurred a little more than a decade ago, most would think it is prudent for lenders and buyers to ensure a completed appraisal for the financing of real estate. In most cases, this is true, but there are some occasions where a buyer may feel secure with the value of their purchase, and a lender feels secure enough with their collateral without needing an appraisal. Surprisingly, there are times when forgoing an appraisal may even be beneficial to a buyer.

Before you might consider an appraisal waiver, here are some things you should know:
  • When can appraisal’s be waived?
  • What determines whether an appraisal can be waived?
  • What are the pro’s of waiving an appraisal? 
  • What are the con’s of waiving an appraisal?
(Remember, appraisals are different than home inspections.)
 
When can an an appraisal be waived?
 
As of now, FHA, VA & USDA-RD loans only allow appraisal waivers for some Streamlined Refinance programs, but not for purchase loans.  At this point in time, only Conventional purchase loans backed by Fannie Mae & Freddie Mac may on occasion allow for an appraisal waiver. In fact, Freddie Mac estimates that eventually 15% of new loans will be closed without an appraisal (1). 

What determines whether an appraisal can be waived?

The computer of course….The mortgage lender will enter in all of the data into their automated underwriting system (AUS) regarding the amount of the buyer’s down payment, credit, property address, etc. The AUS response from Fannie Mae or Freddie Mac determines whether an appraisal waiver may be permitted. Surprisingly, the approval of the appraisal waiver really doesn’t have much, if anything, to do with the credit quality of the borrower. Instead, in the issuing of an appraisal waiver, Fannie Mae and Freddie Mac are relying on their proprietary analytics based on their inventory data, and their online databases. “If [Fannie and Freddie] have a good basic inventory of information about the house, its value, and what it sold for, you’re more apt to get a property inspection waiver,” Don Frommeyer, a mortgage originator at Marine Bank in Indianapolis.

 What elements should a credible appraisal include?

  • A clear, accurate description of the subject property.
  • The homes location, amenities, and features.
  • Sales that are the most recent and most comparable.
  • Comments that explain important issues in the appraisal.
  • An opinion of value supported by the analysis of the comparable sales.
  • Interior and exterior photos of the subject property.
  • Exterior photos of the comparable sales used and maps indicating the location of the subject property in relation to the comparable sales. 
Pros
  • An appraisal waiver can shorten the financing process by eliminating the wait time for an appraisal to come in.
  • Reduced financing costs by eliminating the cost of the appraisal which can cost between $450-$550.
  • Agreeing to an appraisal waiver might make a buyer’s offer look more attractive to a seller which can sometimes make the difference in getting their offer accepted when competing against multiple offers.

Cons

  • In my experience, as a mortgage lender, most home buyers prefer to pay for an appraisal. They like to see the photos, the comparisons, the girds, the maps. They want something tangible showing their very important purchase was a good investment.
  • Although many buyers prefer the option of being granted an appraisal waiver, not all are convinced that no-appraisal loans are a wise decision, and could result in over paying for the property.
“Fannie and Freddie’s computer programs cannot keep cannot smell 20 cats living at the property,” says Ryan Lundquist, an appraiser based in Sacramento, California “They won’t be able to identify problems that could potentially lower the value of the home.” (1).  I guess he does make a good point there. 
Conclusion
Fannie Mae and Freddie Mac have created this option in response to market drivers, allowing lenders to offer their borrowers a choice for efficiency and cost savings by foregoing an appraisal on some refinance as well as purchase transactions. Whether you are considering an appraisal or an appraisal waiver with a new home purchase, I will be right there by your side, along with your Realtor, advising you towards the best options possible