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Buying a home: You might be able to skip the home appraisal — but should you?

Peter Miller
The Mortgage Reports contributor

If your home costs less than $400,000, an appraisal might not be required 

Home appraisals are a key part of the home buying process. An appraisal ensures that the buyer pays a fair price and protects the mortgage lender against potential losses.

However, home appraisals can feel like a burden. They’re an added cost for the buyer and often a source of worry for sellers and brokers. 

To reduce that burden, a handful of government agencies recently passed a rule saying home appraisals would no longer be required on homes selling for $400,000 or less. 

Before you pick up the phone to cancel your upcoming appraisal, know that major lenders will likely still require them on most sales under the $400,000 threshold. Your best bet to save on costs is still to compare rates and choose the most competitive lender.  

But if you have the option to skip a home appraisal and save a few hundred dollars — should you do it? 

Save more by finding a low mortgage rate. Start here (Oct 22nd, 2019)

Home appraisals 101: Pros, cons, and cost 

Before thinking about whether to opt in or out of a home appraisal, it’s important to understand what actually goes on at this stage of the home buying process. 

In short, an appraisal verifies the seller hasn’t overpriced the home. A professional appraiser will inspect the property, compare the price tag to other “similar” homes in the area, and come up with a fair market value to compare to the sale price.

Appraisals are generally paid for by the buyer — and the cost is significant. According to a 2019 study by HomeAdvisor, the typical price range for an appraisal is $311-$404. 

That said, appraisals also protect the buyer. If an appraisal turns up an unreasonably high sale price, it could save the buyer much more than the $300-$400 they spent for the service. So would it be worth it to skip one? 

Home buying starts with a personalized rate. Start here (Oct 22nd, 2019)

Who can actually opt out of a home appraisal under the new rule? 

The new rule passed by the OCC, the FDIC, and the Fed says that any home sale under $400,000 could be exempt from an official appraisal. 

The previous no-appraisal limit was set at $250,000 — which hadn’t changed since 1994. The higher limit is meant to account for housing price appreciation over the last 25 years. 

Raising the exemption bar from $250,000 to $400,000 could have a huge impact on home appraisals, in theory. HMDA data from 2017 shows that about 72 percent of mortgage transactions fall under that threshold. 

However, most of those home sales will likely not end up going through without an appraisal. 

Historical data shows that even when appraisals aren’t required, mortgage lenders still enforce them most of the time anyway. 

The reason? Mainstream mortgage lenders will almost always require an appraisal, whether or not it’s mandated by law, because it can protect them against loss in case the borrower defaults. 

In fact, a five-year review showed that under the $250,000 threshold, lenders still obtained appraisals for 74 percent of properties that were technically exempt. 

So even if you’re buying a home priced under $400,000 in the near future, don’t expect to have an automatic get-out-of-appraisal-free card. 

If you’re refinancing instead of buying, the likelihood you’ll be able to skip the appraisal is much higher. 

Related: Do I need a home appraisal to refinance my mortgage?

If most buyers won’t be exempt from appraisal anyway, then what’s the point? 

Agencies that lobbied for this rule change argue that the appraisal requirement, which hasn’t changed in more than 20 years, has placed an “increased burden on [lenders] and consumers in terms of transaction times and costs.” 

Proponents hope the new rule, where applied, will make the home buying process faster and reduce closing costs.  

There’s also an element of consumer choice and technology creeping into the mortgage industry here. 

Mortgages exempt from an official appraisal still need to be “evaluated” for pricing fairness. 

In certain cases, that evaluation can be done electronically with an “automated valuation model” (AVM) instead of a home appraisal — but only with the buyer’s consent. 

Without someone physically going through the property, will you get the right value? Some worry that buyers who go the evaluation route could end up overpaying. 

However, all evaluations that replace appraisals are required to meet guidelines for “safe and sound banking practices.” Many argue that such evaluation models are a cheaper and more efficient way to determine home value.  

How appraisals impact your mortgage

Mortgages and appraisals go together like salt and pepper. You can see the importance of appraisals in several ways.

First, while buyers and sellers may agree on a sale price, that’s not enough for lenders. They want an estimate of value from an independent professional. The result is that appraisers are paid for the act of valuing a property, not for finding a particular value.

Second, once they have both a sale price and an appraised value, lenders will make loans based on whichever value is lower. Lenders take this conservative approach to make sure that buyers have enough of their own funds invested for the loan program.

Once they have both a sale price and an appraised value, lenders will make the loan based on whichever value is lower.

For example, some Fannie Mae loans have a 3 percent down payment requirement. The fact that the buyer has a 3 percent investment makes the loan safer for the lender. But if a $97,000 property appraised for $100,000, basing the loan amount on the higher value would have the buyer putting zero down. This adds risk to the loan.

However, appraisals can also throw a wrench in the closing process. Data from the National Association of Realtors says appraisal issues cause about 16% of closing delays. These issues typically arise when a home is valued under its sale price, and buyers and sellers must agree on an adjustment.

Do mortgage borrowers really need appraisals?

Appraisals have pros and cons for borrowers. 

On one hand, borrowers want appraisals to prevent overpaying for a property. In effect, they’re an important form of consumer protection. 

On the other hand, standard appraisals cost hundreds of dollars at a time when there are a lot of expenses for borrowers, and money can be tight. That might dull their appeal for many home buyers. 

What it means for you 

So, if you’re given the chance, should you skip the home appraisal? 

If it saves you money, the answer might be yes. Lenders are required to at least obtain an evaluation, which adds a safety net against you overpaying by any significant margin. 

If you’re not confident in the evaluation method offered, then go with the traditional appraisal. 

At the end of the day, the most important thing is to make sure you feel rock solid about the sale price, as well as your overall closing costs and final mortgage rate. 

Compare mortgage rates from major lenders to find the best deal. Start here (Oct 22nd, 2019)