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Getting an appraisal waiver could help you keep money in your pocket. The waiver lets you skip the cost of an in-person appraisal. That’s the upside. Now, here’s the potential downside: Like many services you might go back and forth on during the home-buying process, appraisal waivers come with some risks, and they can only be applied in certain situations.
Understanding the appraisal waiver process, including all its pros and cons, can help you decide if it’s the right choice for you.
What Does an Appraisal Waiver Mean?
First, let’s quickly review what an appraisal is before you decide to waive it. An appraisal is when property and land are assessed by a licensed appraiser to determine its dollar value.
When you buy a property, you typically get an in-person home appraisal done as part of the mortgage loan process. The appraiser examines the interior and exterior of the home and uses data from recent home sales in the area to calculate the home’s market value.
That appraisal figure helps buyers and lenders verify that the selling price is relatively close to the property’s value.
The in-person home appraisal can be a valuable tool when the home has visible structural defects or wear and tear that could sink the value of the property below the seller’s asking price – sometimes by tens of thousands of dollars.
An appraisal waiver allows qualified home buyers to skip the in-person home appraisal. Instead, the mortgage lender only uses data from recent home sales in the area to determine the property’s value.
Home buyers generally opt for an appraisal waiver to save money and time.
An in-person appraisal can cost hundreds or even thousands of dollars – hence the money-saving part of the equation. Second, an in-person assessment requires time: time to appraise the house and time to write up the report. Getting an appraisal waiver cuts out those steps and saves everyone (from the buyer to the appraiser to the lender) time.
There is, however, one tiny plot twist. An appraisal waiver doesn’t eliminate the appraisal from the home buying process – it waives the need to perform a traditional, in-person appraisal. The home’s value must be confirmed before a lender can approve a mortgage.
And not all lenders are fans of appraisal waivers. If the lender isn’t sure about the condition of the house or has reason to believe it needs an in-person appraisal – they can deny an appraisal waiver request.
Government-backed loan programs, like Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans, don’t accept appraisal waivers.
But, an appraisal waiver refinance may be approved for these government-backed loans:
- VA Interest Rate Reduction Refinance Loan (IRRRL)
- FHA Streamline Refinance
- USDA Streamline-Assist refinance
Conventional mortgage lenders that offer conforming loans (loans that meet Fannie Mae and Freddie Mac guidelines) are typically the only ones that will approve waiving an appraisal contingency.
Here are a few reasons why a lender may approve an appraisal waiver:
- The property recently had an in-person appraisal. For example, if someone sells a home they only bought a year or two ago.
- The loan-to-value (LTV) ratio is relatively low, which means the home has a significant amount of equity in it.
- The lender wants to speed up the underwriting process.
- The property is a single-family home or condominium with one unit.
Lenders that approve appraisal waivers for conventional mortgages use data from an automated underwriting system run by Fannie Mae or Freddie Mac to complete the assessment.
How Does an Appraisal Waiver Work?
If you got approved for a waiver, here’s a quick overview of what should happen next.
Fannie Mae has developed two systems to help lenders with the appraisal waiver process: Desktop Underwriter® and Collateral Underwriter®. Desktop Underwriter® is an automated underwriting system that assists with property appraisals for conventional and government loans. Collateral Underwriter® is an appraisal risk-assessment program that helps lenders look for signs that a property may be overvalued or that the quality of previous appraisal data is in question.
The Fannie Mae appraisal waiver process follows these steps:
- The lender submits the case file to Desktop Underwriter®
- Desktop Underwriter® issues an offer to waive the appraisal
- The lender accepts the appraisal waiver offer
- The lender delivers the loan to Fannie Mae
- The borrower is enrolled in Fannie Mae’s Day 1 Certainty™ program
While an appraisal waiver may sound like the right choice for you, it’s important to keep in mind that not all buyers can get an appraisal waiver.
Who Qualifies for an Appraisal Waiver?
To qualify for an appraisal waiver through Fannie Mae, you and the property you’re buying must meet certain appraisal waiver requirements.
The qualification requirements for the buyer are:
- A conventional loan
- A good credit score
- Provide proof of assets
- Make a 20% down payment
The qualification requirements for the home are:
- Meet the lender’s loan-to-value (LTV) ratio requirements
- Must be a single-unit property, including condominiums
How Do I Apply for an Appraisal Waiver?
Reach out to your lender. Ask if they allow appraisal waivers. If they say they do, ask them if you and the property you’re buying meet the requirements for a waiver.
Your lender will take over at that point and submit your paperwork to either Fannie Mae or Freddie Mac.
Once your application goes through an automated underwriting system, your lender will let you know if you’ve been approved for a waiver.
What Are the Benefits of an Appraisal Waiver?
Appraisal waivers present home buyers with some pretty clear advantages, including:
- Reduced costs: An in-person appraisal can cost as much as $2,000. An appraisal waiver eliminates that cost.
- Faster closing time: Scheduling an in-person appraisal can take a while and push back the closing date.
- Less stress: Waiting weeks for an appraiser to get back to you with a decision on an appraised value can be stressful.
What Are the Drawbacks of an Appraisal Waiver?
There are benefits to getting an appraisal waiver, but there are also disadvantages, including:
- An appraisal waiver won’t provide as detailed a property inspection as an in-person appraisal. This means you may not learn about some significant defects in the property until you’ve already bought it. You wouldn’t want a nest of termites to eat through that walnut coffee table you were so excited about.
- With an appraisal waiver, the home’s value gets assigned based on data from home sales in the area. That means the estimate might not accurately represent the true value of the home. You could end up paying more for the home than it’s worth. And, sorry to pile on, but it could also mean that you’ll have negative equity when you close on the home.
- If the automated appraisal done by utilizing your appraisal waiver comes in too low, you might find yourself in a position where you’re paying less than the home is actually worth. And when it comes time to sell the house, you might end up undervaluing the home and pricing it too low.
- If your purchase contract has an appraisal contingency clause, and the appraised value of the home comes in below your offer, your lender may not approve your mortgage application. If the seller isn’t willing to lower their price, or asks you to make up the difference in cash, you might have to walk away from the deal.
- If your credit score changes after you apply for an appraisal waiver and drops below the required score, your application may not be approved. If your lender tells you that you didn’t qualify for the waiver, you’ll need to work with your lender to arrange an in-person appraisal.
An Appraisal Waiver May Be the Right Choice … for Some
Deciding which home you wanted to buy wasn’t a snap decision. So, waiving your right to an in-person appraisal shouldn’t be a snap decision either.
You’ve got a lot to consider before you greenlight an appraisal waiver. Think about your financial situation, how soon you need or want to be in the home and how confident you feel about the “health” of the property. Trust us, leaky roofs are a good sign that getting a waiver appraisal may not be worth the time or money you save in the short term.
If the benefits outweigh the risks, it might be the right choice for you. Just promise us that you’ll actually weigh those benefits and risks.
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The Short Version
- An appraisal waiver allows home buyers to skip in-person appraisals. Lenders use data in an automated underwriting system to determine a property's value
- You might waive an appraisal if you make a large down payment and find out that the determined value won't impact your ability to borrow the remaining amount from your lender
- If the value of the property is less than the selling price, a home buyer may need to cover the difference