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A home appraisal is an important step in the homebuying process — in fact, if you are financing your purchase with a mortgage, your lender will likely insist on one. However, in some cases, a lender may choose to waive their appraisal requirement. Why? And is it a good idea for you, the buyer? Read on to learn more about the benefits and risks of appraisal waivers in real estate.
What is an appraisal waiver?
Appraisal waivers allow buyers who meet certain qualifications to skip the appraisal process when buying a home. For these qualified buyers, instead of requiring a professional in-person appraisal, the lender will typically rely on automated underwriting systems to determine the value of the home.
Being granted an appraisal waiver can save buyers money and time, since they do not have to pay for an appraisal and the closing process could be sped up. However, a professional appraisal is probably the most accurate way of determining a home’s value, so buyers who skip it run the risk of overpaying for the home.
Automated systems produce the best results when there are a lot of near-identical properties being sold around the time you are buying — for example, in a new condo building where many units hit the market at once. But if you’re buying an older home in an area where all the homes are different, the odds of getting an accurate estimate of value decline.
How do you qualify for one?
The main necessity to qualify for an appraisal waiver is that you must take out your home loan with a lender who uses the automated underwriting systems run by Fannie Mae (their system is called Desktop Originator) or Freddie Mac (theirs is Loan Prospector, recently rebranded as Loan Product Advisor). Waivers can only be granted for purchases of single-unit first or second homes and condos, with limited cash-out refinancing options; they are not available for construction loans, co-ops or purchases totaling more than $1 million.
But there are plenty of other criteria you’ll need to meet, too. You’ll likely need a very high credit score, for example, and a low loan-to-value ratio. You’ll also likely need to put down a down payment of at least 20 percent of the home’s purchase price. In the case of a Fannie Mae loan, they must find a prior appraisal of the property in their database.
Your chances of qualifying are typically higher if the home you are buying has been professionally appraised fairly recently (like in the past year or so), and if you are buying in a neighborhood in which there have been several other recent sales, giving your lender solid comps to examine. Specifics will vary by lender, and some may have even more criteria that must be met.
Benefits and risks of appraisal waivers
As a buyer, getting an appraisal waiver has some advantages, including saving you cash. Here are some of the pros:
- Saving money: You don’t have to pay for a professional appraisal — they typically cost around $350, according to HomeAdvisor.
- Closing faster: Not having to wait for an in-person visit can speed up the closing process.
- Social distancing: It may not be as much of an issue these days, but the pandemic caused many sellers to question how many outside people they wanted to let into their home. Allowing homeowners to avoid another in-house visit may score you points as a buyer.
Of course, there are potential risks as well. Here are some appraisal-waiver cons to consider:
- Missed issues: Human appraisers can see (and hear, and smell) things that computer algorithms can’t. In addition, algorithms often rely on public records, which are not always current. Without a live appraiser’s assessment, you could miss out on spotting a problem — and have to pay for it later.
- Inaccuracy: Algorithms need a large amount of recent data to produce correct results. If the data is not available in your market, or if the market is volatile and changing frequently, it could adversely affect the reliability of the results. And if the value of the home turns out to be lower than you thought, you may have trouble refinancing or selling for a profit down the road.
- Overpaying: There’s a risk of paying too much for the home, especially if the sellers haven’t had their home appraised in a while and the market has gone up. An accurate value is also important for insurance purposes, as you don’t want to over- or under-insure your home.
Appraisal waivers can be a beneficial option for some buyers, as they save money on appraiser fees and can speed up the closing process. However, the potential risks, such as getting an inaccurate or incomplete picture of the home’s value, can be significant. In the end, saving a few hundred dollars on an in-person appraisal can turn out to be penny-wise and pound-foolish.