Reduce Your Costs By Ditching The Home Appraisal
Many people are not thrilled when it comes time to get a home appraisal. Appraisals can take too long, delaying closings. They can be expensive. They may be performed poorly, causing delays and additional costs.
As a result of such concerns, there’s growing interest in appraisal alternatives.
These options are likely to become more common for three central reasons.
Fewer Appraisers, More Delays
First, the number of appraisers is declining. According to the Appraisal Institute, the number of active real estate appraisers declines by nearly three percent a year. This trend is expected to continue for the next five to 10 years.
Fewer appraisers can mean higher costs and scheduling delays, a potent problem especially for borrowers with a lock-in deadline or closing cutoff date.
Home Appraisals More Complicated — And Expensive
Second, appraisal requirements have become more complex, increasing the time and skill needed to complete reports.
Reforms intended to strengthen appraisals increased the cost to borrowers. Because mortgage lenders don’t get to choose the appraiser who performs the work, appraisal management companies (AMCs) have taken over the industry — raising prices by up to 40 percent.
Automation Of The Industry
Third, financial technology (FinTech) is here. Electronic systems have captured huge amounts of pricing data, much of which is publicly available.
These systems can produce detailed, speedy, and less expensive valuations.
Home Appraisal Rules
According to the government, not all real estate transactions require appraisals. You can generally skip an appraisal when the loan amount is $250,000 or less AND the transaction involves “certain renewals, refinances, or other transactions involving existing extensions of credit.”
Dodd-Frank has a parallel standard. It says that “in conjunction with the purchase of a consumer’s principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.”
In other words, you need an appraisal for the PURCHASE of a primary residence, but not to REFINANCE when the loan amount is $250,000 or less.
You also need a lender willing to skip appraisals.
Purchases Require Protection
You’ll likely need an appraisal when you purchase property. With a purchase, lenders provide financing based on the property’s sale price or its appraised value, whichever is lower.
In other words, lenders do not want to depend on buyers and sellers to establish a property’s value. They want to rely on experts who are paid for the act of appraising— not sellers and agents whose paychecks depend on making the sale work.
Refinancing, Not So Much
With a refinance, the situation is different. The borrowers have an established payment history. The home’s purchase price and comparable local prices are well-known.
Also, for a rate-and-term refinance, borrowers don’t pull additional cash out of a property. They are often lowering their monthly costs, and that means less risk for lenders.
The VA Streamline Refinance – what the government calls an Interest Rate Reduction Refinance Loan (IRRRL) – does not typically require an appraisal. Ditto with an FHA Streamline Refinance.
It seems likely that we will increasingly see a far larger number of refinance loans which do not require an appraisal.
For instance, in December 2016, Fannie Mae rolled out its “Day 1 Certainty” program, a plan to reduce lender liability, costs and time when they sell a loan.
Under the plan, lenders can get a “property inspection waiver.” Fannie Mae will accept the lender’s valuation without an appraisal. If it later turns out that the estimate was wrong, the lender will not be forced to buy back the loan.
Fannie Mae can do this in many cases by looking at electronic records of similar sales in the neighborhood.
Lenders can use the Fannie Mae plan with single-family homes, but not for properties with two-to-four units. And appraisals are required for houses worth $1 million or more. Co-ops and manufactured homes are also not eligible.
What A Home Appraisal Provides
For many borrowers, fewer appraisal hassles will be a source of relief. However, appraisals have real value and should not be easily discarded.
If you’re a home buyer, you certainly don’t want to pay more than you should for a new property. That’s a hazard appraisals can help you avoid. You also want someone to go into the house. That’s not (yet?) possible with automated appraisal software.
For refinancing, lenders and investors have become increasingly comfortable with automated valuations when both the property and the borrower are well-known.
However, automated systems may not give you credit for all of your home’s value if you’ve done major renovations. In that case, you may want a full home appraisal to get a higher value and reduce the loan-to-value ratio of the refinance.
What Are Today’s Mortgage Rates?
Current mortgage rates depend in part on your loan-to-value (LTV) ratio. That’s the ratio between the loan amount and the property value. Lower LTVs get you lower interest rates, and that’s why achieving a higher home appraisal can save you money on your mortgage.