The appraisal waiver: What home buyers shold know

A home appraisal, sometimes known as a valuation, is an important step in the home buying process. It’s a way to make sure you’re not paying more for a home than it’s worth.

The downside of an appraisal is that in-person appraisal options aren’t cheap and home buyers bear the responsibility of paying for one. An in-person appraisal can also slow down a home sale, especially if an appraiser determines that a home is worth less than the amount a buyer has agreed to pay for it.

For these reasons, some buyers ask for an appraisal waiver, which would allow them to purchase a home without a formal appraisal. But, even with the cost savings, is an appraisal waiver a smart move? It depends on a few factors, including how concerned you are about potentially overpaying for your new home.

What is an appraisal waiver?

An appraisal waiver shortens the appraisal process because buyers who qualify for a waiver can skip the in-person visit by a licensed appraiser. Instead, the lender will use data provided by an automated underwriting system to determine the value of the home being sold. This information will include prices from recent nearby home sales and any past sales data from the home the buyer is purchasing.

A waiver can save home buyers both the cost of paying for an appraisal and the time involved in scheduling an in-person assessment.

The challenge here is that not all borrowers and homes will qualify for an appraisal waiver, and lenders are under no obligation to grant a borrower one. For example, a lender can deny a request for an appraisal waiver if they have any reason to believe an in-person appraisal is needed. This gives lenders a lot of discretion in determining who qualifies for an appraisal waiver.

3 reasons a lender might waive an appraisal

Lenders rely on in-person appraisals to ensure they’re not lending more money than a home is worth. If they lend too much, they could face a bigger financial loss if a buyer defaults on their loan.

If a buyer-turned-homeowner stops making their mortgage payments, a lender can foreclose on the property and sell it to recoup their losses. But this is harder if a lender gives a borrower more money than a home is worth. Suppose a lender provides a buyer $200,000 to purchase a home worth just $180,000. If that buyer stops making mortgage payments when they still owe $190,000 and the home is still only worth $180,000, the lender will likely struggle to sell the home for the borrower’s remaining mortgage balance.

So, knowing this, when is an appraisal not required? And why would a lender ever agree to an appraisal waiver? Well, there are a few reasons.

1. The home was recently appraised

Sometimes a lender determines an in-person appraisal isn’t needed if a home was recently appraised and the loan option (30-year fixed conventional loan, for example) will allow qualification with the recent appraisal. Suppose a buyer purchased a home last year but needs to sell it today. A lender might waive a new in-person appraisal because the home’s market value was calculated so recently.

The same can be said for refinancing a home. If little time has passed since the original appraisal, a lender may be willing to waive the in-person appraisal when they’re doing a cash-out refinance or another type of refinance loan.

2. The lender wants to increase efficiency

If a loan option allows for it, waiving an in-person appraisal can make the underwriting process more efficient for both the borrower and the lender. During the underwriting phase, a lender verifies that a borrower can afford their new monthly mortgage payments. In addition, a lender checks the borrower’s credit reports, evaluates their credit scores and seeks to guarantee the borrower isn’t overpaying for their new home.

Underwriting can take anywhere from several days to a few weeks. Eliminating an in-person appraisal when it’s not needed can speed up this process and get the respective parties to the closing table in less time.

3. There’s enough local data

A lender might approve an appraisal waiver if there’s been a number of recent sales of nearby homes, also called real estate comps. Comps give a lender a good idea of the local real estate market, so they’ll have a better sense of the home’s value.

As a result, a lender can feel confident they’re preventing you from overpaying. A lender can also be assured they’re not loaning you too much.

3 reasons a lender might waive an appraisal

Lenders rely on in-person appraisals to ensure they’re not lending more money than a home is worth. If they lend too much, they could face a bigger financial loss if a buyer defaults on their loan.

If a buyer-turned-homeowner stops making their mortgage payments, a lender can foreclose on the property and sell it to recoup their losses. But this is harder if a lender gives a borrower more money than a home is worth. Suppose a lender provides a buyer $200,000 to purchase a home worth just $180,000. If that buyer stops making mortgage payments when they still owe $190,000 and the home is still only worth $180,000, the lender will likely struggle to sell the home for the borrower’s remaining mortgage balance.

So, knowing this, when is an appraisal not required? And why would a lender ever agree to an appraisal waiver? Well, there are a few reasons.

1. The home was recently appraised

Sometimes a lender determines an in-person appraisal isn’t needed if a home was recently appraised and the loan option (30-year fixed conventional loan, for example) will allow qualification with the recent appraisal. Suppose a buyer purchased a home last year but needs to sell it today. A lender might waive a new in-person appraisal because the home’s market value was calculated so recently.

The same can be said for refinancing a home. If little time has passed since the original appraisal, a lender may be willing to waive the in-person appraisal when they’re doing a cash-out refinance or another type of refinance loan.

2. The lender wants to increase efficiency

If a loan option allows for it, waiving an in-person appraisal can make the underwriting process more efficient for both the borrower and the lender. During the underwriting phase, a lender verifies that a borrower can afford their new monthly mortgage payments. In addition, a lender checks the borrower’s credit reports, evaluates their credit scores and seeks to guarantee the borrower isn’t overpaying for their new home.

Underwriting can take anywhere from several days to a few weeks. Eliminating an in-person appraisal when it’s not needed can speed up this process and get the respective parties to the closing table in less time.

3. There’s enough local data

A lender might approve an appraisal waiver if there’s been a number of recent sales of nearby homes, also called real estate comps. Comps give a lender a good idea of the local real estate market, so they’ll have a better sense of the home’s value.

As a result, a lender can feel confident they’re preventing you from overpaying. A lender can also be assured they’re not loaning you too much.

How to get an appraisal waiver

Again, not all home buyers or properties qualify for an appraisal waiver. But, to potentially get one, you’ll need to take out a home loan with a lender that uses the automated underwriting system run by government-sponsored enterprise Fannie Mae (known as Desktop Originator) or Freddie Mac (known as Loan Prospector). The good news is that most lenders use these systems.

Appraisal waiver requirements

Ask your lender to let you know about their appraisal waiver requirements. To qualify for an appraisal waiver, you’ll need a strong credit score. You’ll also need to be purchasing or refinancing a one-unit property, such as a single-family home or condominium.

For most home buyers with a conventional conforming loan to qualify for an appraisal waiver, Fannie Mae will require that they make a down payment worth at least 20% of the home’s price. However, there’s an exception: Buyers purchasing a home in what the Federal Housing Finance Agency (FHFA) identifies as a high-needs rural area can qualify for an appraisal waiver by making a down payment as low as 3% of the purchase price. In this case, a mandatory property inspection – which carries a cost comparable to that of an appraisal – would be required.

To learn more about this requirement and which parts of the country are considered high-needs rural areas, visit the FHFA’s interactive map.

Benefits of waiving an appraisal

Appraisal waivers are fairly rare, but they can provide some benefits for buyers. For example:

• You can save money. The costs of home appraisal in-person visits vary, but they typically are anywhere from $400 – $700. So, getting an appraisal waiver will save you money.
• You may be able to close sooner. An appraisal waiver can reduce the amount of time it takes to close on a home. With an appraisal waiver, your closing won’t be delayed while you wait for an appraiser to schedule a visit to the home you’re buying.
• You can save time. An appraisal waiver saves you the time required to schedule an in-person assessment and wait for the home appraisal to be completed.

Risks of using an appraisal waiver

appraisal waivers also come with some significant risks to buyers. Perhaps the biggest one is that without an in-person home appraisal, a buyer might overpay for a home. Overpaying is hardly the only risk associated with skipping an appraisal, though. Forgoing an appraisal could also have the effects discussed below.

It could result in failure to identify issues with the home

Using all their senses, an in-person appraiser can spot problems with a home that an automated appraisal might not uncover. Because of this, an in-person appraisal might value a home more accurately. A home’s value is key information for buyers to know.

An appraiser might determine that a home is worth $220,000 due to wear and tear, damaged appliances and a sagging foundation. But, an automated appraisal might not account for these problems and could value the same home at $240,000. This could be a problem for a buyer who skips the in-person appraisal and settles for the cheaper option of an appraisal waiver.

It could impact selling in the future

Paying more for a home than it’s worth is always a bad deal. Later, when you sell this home, you might struggle to make a solid profit because the buyer will have the home appraised after they make an offer.

In situations where an appraiser determines a home is worth less than its agreed-upon sales price, many buyers will walk away. Others will request that the seller lower their asking price to the appraised value. A seller who still owes a lot on their mortgage might then take a loss on the sale.

It could impact refinancing

Paying more than what a home is worth can also cause problems if you want to refinance your mortgage. Lenders typically require that a homeowner has at least 20% in home equity before refinancing. Your home equity is the difference between what you owe on your mortgage and what your home is worth.

Before they’ll approve a refinance, lenders will often send an appraiser out to determine the current market value of a home. This won’t be necessary, though, if a lender offers a no-appraisal refinance to homeowners with a Department of Veterans Affairs (VA), Federal Housing Administration (FHA) or U.S. Department of Agriculture (USDA) loan. A buyer who paid more for their home than it’s worth is less likely to have enough equity to qualify for a refinance. That’ll almost certainly be the case if they haven’t made enough monthly mortgage payments to significantly pay down their loan balance.

Skipping the in-person appraisal might save buyers some money upfront during the home purchase, but it could cost them big in the future.

The bottom line: A real estate appraisal waiver can be beneficial, but tread cautiously

It might be tempting to skip the in-person appraisal when buying a home, especially if you’re in dollar-saving mode. However, an appraisal is designed to protect buyers from overpaying for a home. Because of this, it rarely makes sense (or is possible) to skip an in-person appraisal.

If you’re ready to become a homeowner, get started on the mortgage process today.