Do You Need An Appraisal When Refinancing?

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

The refinance appraisal requirement can be nerve-wracking, especially if you live in an older home. But did you know that there are a few ways you can get a refinance without an appraisal? It’s true! 

We’ll take a closer look at what an appraisal is and why lenders require them. We’ll also introduce you to a few limited scenarios where you might want to refinance without an appraisal.

A home appraisal determines the fair market value of your property. During this procedure, a home value expert called an appraiser visits your home and takes a tour around your property. The appraiser also does outside research on your neighborhood and property history,  and issues an official estimate of what your home is worth.

Appraisals are important because they assure the lender that you aren’t borrowing more money than what the home is worth. In most situations, your lender will require that you get an appraisal before you refinance your loan. This helps protect the lender's financial interests.

For example, imagine that you work with a new lender and you refinance a $300,000 loan. If your appraiser finds that your home is only worth $200,000, your lender takes on the $100,000 discrepancy. If you don't pay your bills and your home goes into foreclosure, your lender will have a very hard time recouping that $100,000.

Most local governments also use appraisals to determine how much you must pay in property taxes. You may need to get another appraisal every few years to make sure that you're paying enough in property taxes.

It’s important to note that an appraisal is not the same as an inspection. A home inspection is a very in-depth process that assesses your entire property.

An inspector will look for and document everything that needs to be repaired or replaced in your home. An inspector actively looks for problems with the home that the new homeowner may need to know about. You can expect an inspector to do things like test outlets, run the HVAC system and check out the condition of the roof.

An appraiser doesn’t set out looking for problems in your home. Instead, they only give you an overall estimate of what the home is worth. Your appraiser may take obvious defects into account (like a hole in a wall or a caved-in roof) but they do not document specific problems.

Your mortgage company won’t do your appraisal for you. Most state laws require that the lender hires a third-party appraiser to assign a value to your property.

Your mortgage lender may schedule your appraisal on your behalf. There are three major parts of every appraisal:

• The inspection: The appraiser takes a look at the physical condition of your property during an inspection. They may walk around your entire interior and exterior as well as any structures you have on the property. The appraiser only looks at the overall basic condition of your home and any upgrades you’ve made.

• Outside research: The appraiser finishes the home inspection and does some outside research on other homes in the area. He or she may look at property sales data and other local appraisals. This information also plays into the overall value of your home.

• The final report: Next, the appraiser will deliver a final report that includes an official estimation of how much your home is worth. Both you and your lender receive a copy of your appraisal results.

There are a number of factors that influence your home’s value. Here are some of the things your appraiser considers when he or she places a value on your property.

• The overall condition of your home: Your appraiser doesn’t consider the paint colors on the walls or whether your bathroom sink works when they “assign” your home value. However, they will consider basic elements of the home and the home’s condition. Your appraiser will look at things like the number of bedrooms, how many windows the home has and whether the home has any pressing safety issues, like lead paint. The appraiser also needs to know that someone could reasonably live in your home without issue. If they can’t, expect your home value to be lower.

• Permanent upgrades: Any permanent upgrades you make to your property can increase your appraiser’s estimate. However, only permanent features and fixtures play into your overall value. If you can take it with you when you move, it probably won’t increase your appraisal estimate.

• Local real estate data: Location is a major factor in determining a property’s value. Your appraiser also looks at how home sales data trend in your area when they assign a value to your property.

In an ideal world, everyone who applies for a refinance would receive an appraisal value that’s higher than their total refinance amount. Unfortunately, an appraisal can come back low – which may throw a wrench in your refinance plans.

Your lender usually can’t loan you more money than your home is worth. If your appraisal comes in low, you have two options:

• Decrease the amount of your refinance. You can lower the amount of money you’re taking out in a cash-out refinance. On the other hand, if you’re doing a rate and term refinance, you may need to bring extra cash to closing to make up the difference.

• Cancel the refinance. A low home value might mean that a refinance isn’t right for you at this point in time. You may cancel the refinance, but your lender may still require that you pay the appraisal fee.

You almost always need an appraisal before you refinance a mortgage. However, your lender may waive the appraisal condition if you have a VA or USDA loan.

You may qualify for a VA Streamline refinance if you have a VA loan. VA Streamline refinances are sometimes called interest rate reduction refinance loans (IRRRLs). While many IRRRLs typically don’t include any type of  appraisal, there are circumstances when an appraisal is necessary.

You can also refinance up to 120% of your loan value with an IRRRL, which is a good option if you owe more than your home is worth. All of the following must be true to qualify for an IRRRL:

• You must already have a VA loan that you want to refinance.

• You must already live in the home that you want to refinance.

• You only plan to refinance your interest rate or term – no cash-out refinances.

• You’ve made at least six consecutive on-time payments on your VA loan.

• It’s been at least 270 days since the closing date for your VA loan and your refinance application.

You must also have a clear reason for refinancing. There are a number of reasons that can help you meet this requirement, from lower interest rates to a lower monthly payment. Keep in mind that not every lender who offers VA loans also offers IRRRLs.

The USDA also offers Streamline refinance options for homeowners with a USDA loan. Rocket Mortgage^® does not currently offer USDA Streamline loans.

USDA Streamlines allow you to skip the appraisal requirement when your refinance your rate or term. Like VA IRRRLs, USDA Streamline refinances also have a strict set of criteria you must meet to qualify: 

• You must already have a USDA loan.

• You must have made on-time payments on your loan for at least the last six consecutive months.

• You must have had your existing USDA loan for at least 12 months before you refinance.

• You must meet the USDA’s current debt-to-income (DTI) requirements.

• You must only refinance your rate or term (no cash-out refinances).

You may also qualify for a USDA Streamline-assist refinance. Streamline-assist refinances are the most favorable option for homeowners, as they require no credit checks, appraisals or minimum DTI ratios.

All of the following must be true to qualify for a Streamline-assist refinance: 

• You don’t have a USDA Direct loan.

• You aren’t removing buyers from your note.

• Your refinance will result in a $50 or greater reduction in your monthly mortgage payment.

An appraisal is a basic assessment of your home’s value. Your appraisal value is derived from a number of factors, ranging from local property values to your home’s overall physical condition.

Most lenders require that you get an appraisal before you refinance a mortgage. An appraisal assures the lender that they aren’t loaning you too much money for your property.

You may not need an appraisal to refinance your loan if you have a VA loan or a USDA loan. You may qualify for a Streamline refinance if it cuts out the appraisal requirement.

Each loan type has its own standards when it comes to who qualifies. Keep in mind that you can only refinance your interest rate or term with a Streamline. You cannot get a cash-out refinance without an appraisal.