When Does An Appraisal Waiver Make Sense for Your Client?

The COVID-19 pandemic has changed the real estate industry and home-buying process in many ways.

One of those ways involves the home appraisal process.

Along with triggering historically low mortgage rates and unleashing a home-buying frenzy in many areas of the country, COVID has brought appraisal waivers into the mainstream.

That’s if your client can qualify for one.

Read on to learn about appraisal waivers, their eligibility requirements, pros and cons, and when they make the most sense.

What is an Appraisal Waiver?

An appraisal waiver is an offer to waive the home appraisal for eligible transactions – namely, for mortgages purchased by Fannie Mae and Freddie Mac. Instead of a licensed home appraiser performing an in-person appraisal at the property, the appraisal is performed electronically using data and property analytics to value the home.

When COVID-19 took hold of the U.S. in early spring 2020, appraisal waivers became more frequent, as home appraisers struggled to safely perform valuations within social distancing guidelines.

As we move into 2021, appraisal waivers appear to be sticking around as a valid substitute for an in-person appraisal on home purchases and home refinances. This is in part due to convenience, faster closings, and Fannie Mae & Freddie Mac’s new stance on them.

Eligibility for Appraisal Waivers

It’s important to note that appraisal waivers are not a solution for everyone and every deal.

There are many requirements to be eligible for a waiver, including specific property types, a borrower’s credit rating, and a borrower’s loan-to-value ratio. The home loan must also be approved by Fannie Mae or Freddie Mac and abide by their stringent requirements.

You can view and learn about Fannie Mae’s complete appraisal waiver eligibility requirements here and Freddie Mac’s here.

In general, requirements include:

  • Purchase must be of a single-family, 1-unit dwelling (including condos)
  • Home must be borrower’s principal residence or second home – up to an 80% loan-to-value ratio
  • Second homes and investment properties qualify up to a 60% loan-to-value ratio (when rental income is not used to qualify for investment properties)
  • Limited eligibility for cash-in-cash-out refinance transactions

Pros of Appraisal Waivers

With an appraisal waiver, a lender will determine the home’s value using an online database of aggregated home value data. This includes the recent appraisals of comparable homes nearby.

If your client chooses to go this route and meets eligibility requirements, they’ll have some benefits, including:

  • Saving on an in-person appraisal fee, which generally runs $450 to $600
  • Eliminating worry over an appraisal value coming in too low and potentially having to open up re-negotiations with the seller, follow up with another appraisal, or have the deal fall through
  • Potentially closing on the home faster

Potential Drawbacks of Appraisal Waivers

There are some potential drawbacks by forgoing an in-person appraisal, however.

  • If the computer-generated valuation is not accurate, the lender cannot be held liable. This means if the appraisal is inflated, it may be difficult for the buyer to price the property accurately and sell it quickly in the future.
  • Data-aggregated appraisals aren’t designed to give an accurate, up-to-date assessment of the changing exterior and interior quality of a home. This means recent improvements (or damages) could be overlooked in the process.
  • If the appraisal is inflated (or deflated), the lender cannot be held liable

My Recommendation on Appraisal Waivers

It’s difficult to weigh the pros and cons of forging an in-person appraisal and help your client make the right choice. My advice, in our current real estate market and anytime, is to always protect the buyer’s interests.

As a good rule of thumb is to remember that appraisals are just opinions. Everyone has one.  Just because someone will not pay X amount of dollars for something does not mean that your client would not want to pay more. Things are worth the value that we believe - not just what an appraiser thinks.

Inaccurate appraisals – whether due to an in-person appraiser or a data-aggregated appraiser getting it wrong – does more than affect your client’s potential for a future resale. The accurate or inaccurate appraisal value becomes a key comparison point for all other homes in the area and can drive real estate prices (inaccurately) up or down.

My advice is to evaluate all of the pros and cons closely with your eligible client, talk to other trusted realtors, lenders, and homeowners who have used appraisal waivers in the past and find out their experience. In some scenarios, waivers may work for your client and the deal at hand. In others, the cost of an in-person appraisal may be worth it for your client’s (and your) peace of mind.

Need More Info? Reach Out Anytime!

I’m a licensed mortgage broker serving Arizona, California, Colorado, and Florida and I can help your clients get pre-approved for a home loan and select the best home loan for their specific needs. I can also help them (and you) weigh the pros and cons of appraisal waivers and guide you both throughout the purchase process. Reach out to me anytime at 480-313-7103 or sam@mindfulmoneyusa.com.

* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.