When interest rates dropped to record lows in March, many clients of ours decided to refinance the mortgage on their home. And with COVID going on, Fannie Mae and Freddie Mac loosened their appraisal requirements to keep appraisers from having to enter homes. Excitedly, we started telling clients "Great news! We got you an appraisal waiver!"only to find out many people didn't understand what the good news meant, so we're breaking it down for you here.
First, it means keeping $500-$600 in my pocket that you would have otherwise spent on an interior inspection. Second, it means your lender can go a little bit faster since they aren't waiting on a third party to schedule and perform the inspection, and then turn in the report.
But you might ask why would a lender waive the requirement to get an appraisal? After all, the appraisal is a comprehensive report of your home, the neighborhood, and nearby sales; all of which determine the home's market value that is being as as collateral for your loan. By having an appraiser estimate how much a home is worth, your lender can better understand the transaction's risk.
With an appraisal waiver however, the lender calculate's your home's value instead by using an automated system that takes into condition data that is available online. In the COVID-19 era, appraisal waivers have become increasing popular because it means limiting the exposure of an extra individual to you in your home.
Guidelines for appraisal waivers are set by Fannie Mae and Freddie Mac. Generally speaking, you can possibly be eligible if your buying or refinancing a single-family home or condo (even if it is a second home or investment property). Manufactured homes, co-ops, multi-unit properties, and new construction homes generally aren't eligible. Lenders are seeing appraisal waivers more often on refinances as well, since you are already own the property and are making regular mortgage payments on time.
You should also keep in mind that the value generated by the automated software is just a tool used by lenders to give context to your loan application and help them determine the risk associated with your transaction. The value will have no bearing on what a potential buy might be willing to pay for it in the future. Ultimately though, lenders are using this value as a critical component of the underwriting process, so they are going to do everything they can to get it right.
If you're unsure if an appraisal waiver is a good choice for you, you can simply request an in-person appraisal and opt not to take advantage of the waiver.