No-appraisal refinance: Should you do it?

Refinancing can save you money by lowering your interest rate, letting you change your loan term, or borrowing against your home equity with a cash-out refinance. But if you've been making your monthly payment and don't plan to move, do you need to appraise your home to refinance? The answer depends on what you plan to do with your refinance and what kind of loan you're refinancing. Learn more about when you can skip the appraisal when refinancing your mortgage.

Do you need an appraisal to refinance?

Not necessarily, as there may be some cases where you can refinance a mortgage without an appraisal. In most circumstances, your lender will request an appraisal before you refinance your loan. This is done to help protect the lender’s financial interests.

A home appraisal is a basic assessment of your home’s fair market value. Several factors impact your appraisal value, ranging from your home’s overall physical condition to the local property values in your area. Most lenders require that you get an appraisal or another form of real estate valuation to ensure that they won’t loan you too much money before you refinance.

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.

Do you need an appraisal to refinance your home?

An appraisal is often required to refinance. Your home's value determines your equity, which is the difference between what your home is worth and how much you owe on it. Equity affects the loans and interest rates you can qualify for and how much you can borrow. If you plan to pursue a cash-out refinance, an appraisal will show how much money you can borrow.

However, there may be some cases where you can refinance without an appraisal, especially if you're not borrowing against your equity.

Ways to get a no-appraisal refinance

Your lender may waive the refinance appraisal requirement if you have an eligible home loan. In particular, government-backed mortgages such as Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans may waive the refinance appraisal.

Conventional loans with an appraisal waiver

A conventional mortgage is issued by a private lender without direct backing from the U.S. government. However, most conventional mortgages conform to federal requirements that allow your lender to sell the loan to Fannie Mae or Freddie Mac.

In most cases, you will need a new appraisal with a conventional loan refinance. But if you have a strong credit profile and application, your conventional loan lender may waive your appraisal.

Restrictions

To get a no-appraisal refinance on a conventional loan, you'll need:

• A credit score of at least 740
• A stable income
• Enough home equity, typically 20%
• Own a single-family home or a one-unit property.

Conventional loan appraisal waivers typically require the loan to be for a rate-and-term refinance or limited cash-out refinance. Additionally, the loan requires approval from Fannie Mae or Freddie Mac. For Fannie Mae loans, a previous home appraisal must already be on file. Freddie Mac may not approve a waiver for a cash-out refinance.

FHA Streamline refinance

An FHA Streamline refinance is designed to reduce paperwork, and no appraisal is typically required because there is no minimum equity requirement. An FHA Streamline can also reduce your annual mortgage insurance premium (MIP) to 0.5% of your loan amount.

Restrictions

To qualify for an FHA Streamline refinance:

• Your existing mortgage must be an FHA loan.
• At least 210 days must have passed since your previous mortgage closed.
• At least 6 months have passed since your first mortgage payment was made.
• At least 6 payments have been made on your current loan.
• You have had no more than one late mortgage payment in the past year and none in the previous 6 months.

Some limits apply to an FHA Streamline refinance. First, a cash-out refinance is not allowed. You must also consider what the FHA would consider a tangible net benefit from refinancing. This can include a lower monthly payment, a lower mortgage rate, or a switch from an adjustable-rate mortgage to a more predictable fixed-rate loan.

Even if you're lowering your rate or changing your loan term, there are restrictions around how much your rate can or must increase or decrease. Limits also apply to how much your payment can go up.

VA Streamline refinance

A VA Streamline refinance is sometimes referred to as an Interest Rate Reduction Refinance Loan, or IRRRL. You can qualify for a VA Streamline refinance if you already have a VA loan. You can refinance up to 120% of your loan value with a VA Streamline. That's a handy option if you owe more than your home is worth. However, while many VA Streamlines don't require an appraisal, there are scenarios in which one is necessary.

Restrictions

All the following must be true to qualify for an IRRRL:

• You must already have a VA loan.
• You must already live in the home that you want to refinance.
• You only plan to refinance to change your interest rate or term.
• You've made at least 6 consecutive on-time payments.
• It's been at least 270 days since you closed your current VA loan.

Additionally, you must have a clear reason for refinancing, such as obtaining a lower interest rate or reducing your monthly payment.

If you have a second mortgage on the home, the holder must agree to make your new VA-backed loan the first mortgage.

Keep in mind that not every lender who offers VA loans also offers IRRRLs.

USDA Streamline refinance

A Streamline refinance option also is available to homeowners with a USDA loan. This option allows you to replace your existing USDA loan with a new one, usually to lower your interest rate or adjust the loan term. Little to no home equity is required, allowing you to refinance up to the full value of your home. And no home appraisal is required in most cases, as you're already occupying the property and merely switching from one USDA loan to another.

Restrictions

Like VA IRRRLs, there's a strict set of criteria you must meet to qualify for a USDA streamline refinance:

• You must already have a USDA loan.
• You've made on-time payments on your loan for at least the last 6 consecutive months.
• You've had your existing USDA loan for at least 12 months before you refinance.
• You meet the USDA's current debt-to-income ratio requirements.
• No cash-out refinances.

Also, the home must be your primary residence and owner-occupied. If your current loan includes a USDA Direct Loan subsidy, an appraisal may still be required.

You must demonstrate some financial benefit from the refinance, such as the ability to reduce your interest rate. The new loan cannot exceed the original loan amount plus guarantee fees.

Rocket Mortgage^® doesn't offer USDA or USDA Streamline loans. Still, we want you to understand them so you can make the best borrowing decision.

USDA Streamline-Assist refinance

A USDA Streamline-assist refinance permits homeowners to replace their current USDA loan with a new one, often to decrease their interest rate and monthly payments. It's designed to be faster and easier than a standard USDA Streamline refinance, requiring no appraisal, credit check, or DTI ratio requirement. You may also lower your closing costs when using this type of refinance.

Restrictions

When it comes to requirements, all the following must be true to qualify for a Streamline-assist refinance:

• You aren't removing buyers from your mortgage note, except in the case that one of them has died.
• Your refinance will result in a $50 or greater reduction in your monthly mortgage payment.
• You've had your current USDA loan for at least a year.
• You've made on-time payments for at least the past year.
• As with other USDA loans, you can't take cash out.

Rocket Mortgage does not offer USDA Streamline-Assist refinances, but we want you to know about all your borrowing options.

Use an automated valuation model

An automated valuation model, or AVM, uses a computer algorithm to determine the value of a property. They're often used by home listing platforms and consider a property's size, number of rooms, features, and other recorded data. AVMs may also use data from online listing platforms.

While AVMs can provide accurate valuations based on the available information, few lenders accept AVMs as a substitute for a professional appraisal.

Restrictions

The following criteria typically apply to AVMs:

• The loan must be a conventional Fannie Mae or Freddie Mac mortgage.
• The home must be a one-unit property.
• Appraisal waivers are typically allowed for rate-and-term or limited cash-out refinances.
• LTV caps are typically limited to 90% for rate-and-term refinances, with caps ranging from 70% – 80% for second homes and investment properties.
• The loan must pass an automated underwriting system.

Pros and cons of a no-appraisal refinance

Here are the upsides and downsides to a no-appraisal refinance.

Pros

• You'll save money. A home appraisal for a single-family home costs $300 – $400. By waiving the appraisal, you save on closing costs. Plus, you can remove the risk of a low valuation that could trigger the need to pay for private mortgage insurance.
• You can refinance faster. Skipping the appraisal means bypassing a step in the refinance process. Refinances can drag out if it takes longer for your lender to schedule an appraiser.
• You can save yourself some stress. Refinancing can be stressful if there's a chance the appraisal will come in lower than expected.

Cons

• You could overpay for your mortgage. Minus an appraisal, you may not know whether your home's value has increased. That means you could end up paying more for your home than it's worth.
• You might miss out on a lower rate. If an appraisal shows that your home's value has increased, you could qualify for better interest rates and terms. A no-appraisal refinance does not offer this option.
• You might miss the chance to cancel your mortgage insurance. An appraisal can tell you and your lender how much your home has increased in value. An appraisal could also show your home equity has increased enough to cancel your private mortgage insurance (PMI).

The bottom line: Refinancing without an appraisal has risks and benefits

While many refinances require an appraisal, you may not need one, depending on the type of loan you choose. That's especially true if you qualify for a Streamline refinance that eliminates the appraisal requirement. Just keep in mind that, even if an appraisal isn't needed, there are benefits and drawbacks to refinancing without one.

If you're considering this option, Rocket Mortgage® can help. Get started online today and see if you qualify for a no-appraisal refinance.