What Is an Appraisal Waiver? A Way To Save Cash on a Refinance
When interest rates dropped to record lows in March, I decided to refinance the mortgage on my house. Yet after applying for a refi with my lender, it sent me an email that left me scratching my head.
“Great news,” it announced. “We got you an appraisal waiver!”
Nice. So what is an appraisal waiver?
Mystified, I dove in to Google to figure out exactly what this meant for me. For one, my lender assured me, it meant keeping $625 in my pocket that I would have otherwise spent on an in-person appraisal.
But why would my lender offer to waive the appraisal? Was it just benevolence, or was something else going on here? I wondered if there was a catch.
So I did some digging, and learned more about this option, the pros and cons, and whether it’s a good idea for me. Here’s the scoop on this confusing home financing concept, broken down into plain English.
What is an appraisal waiver?
An “appraisal waiver,” also known as a property inspection waiver, is a real estate term that simply means you’re not required to have an appraiser assess the value of your home.
When you’re buying or refinancing property, your lender typically appoints an independent appraiser to assess how much the place is worth. An appraiser visits your home, studies it inside and out, analyzes your neighborhood, and reviews nearby home sales among other factors before deciding on your home’s market value.
By having an appraiser estimate how much a home is worth, this helps your lender better understand the transaction’s risk. After all, your home serves as the loan’s collateral, meaning that if you stop paying your mortgage, your lender can foreclose on your property, take it over, and then sell the place to recoup its losses. To your lender, a home appraisal is a safeguard.
With an appraisal waiver, however, your lender calculates your home’s value instead—and rather than an in-person visit, it uses software and algorithms that take into account market conditions, recent nearby home sales, appraisal reports, and other data.
Lender appraisals are typically offered for free, whereas independent home appraisals range in price from $200 to $750, depending on where you live. And since the home buyer or homeowner typically pays the appraisal fee, an appraisal waiver can save them that money.
Why lenders offer appraisal waivers
Appraisal waivers were once rare, but the coronavirus pandemic has made them more popular.
After all, offering an appraisal waiver means lenders can skip sending an appraiser—a living, breathing human being—into a home. In the era of COVID-19, an appraisal waiver is a safer, healthier option that helps limit the potential spread of the virus.
Fannie Mae, one of the government-backed companies that support the mortgage lending industry, even began recommending that lenders offer appraisal waivers whenever appropriate during the pandemic.
How to apply for an appraisal waiver
The guidelines for appraisal waivers are set by Fannie Mae and Freddie Mac, institutions that buy mortgages from banks and lenders. While there are pages and pages of rules and regulations for allowing appraisal waivers, generally speaking, you’re eligible for one if you’re buying or refinancing a single-family home or condo (even if it’s a second home or investment property).
Manufactured homes, co-ops, multiunit properties, and new construction homes generally aren’t eligible.
Want to find out if you qualify for an appraisal waiver? Just ask your lender.
Fannie Mae and Freddie Mac offer special underwriting software that helps lenders ensure they’re meeting these two institutions’ loan requirements. This software evaluates properties by using data from millions of home sales, including appraisal reports. It analyzes your loan, then produces a simple yes or no recommendation for an appraisal waiver.
From there, your lender can choose to offer you the appraisal waiver or require an in-person appraisal.
“Fannie or Freddie might not require one, but the lender will require it to protect themselves based on the loan’s profile,” says Kevin Leibowitz, mortgage broker and founder of Grayton Mortgage.
You also get a say in the matter: Since it’s your home and you’re spending hundreds of thousands of dollars, you can choose to accept the waiver or ask your lender to order an appraisal.
Who should get an appraisal waiver?
While appraisal waivers are growing in popularity, they’re rarely used during the home-buying process and are almost exclusively used with refinancing. This makes sense from the lender’s perspective. During a refinance, you already own the property and are (hopefully) making regular mortgage payments on time, which makes you a safe bet.
Home buyers, on the other hand, are more of a gamble to lenders, and may be less likely to have an appraisal waived. However, if you have a stellar credit score, plenty of money in the bank, rock-solid employment history, and other elements of a strong borrower profile, lenders may offer you the waiver. If you’re a less than ideal borrower or you’re pursuing a riskier financing option (like a cash-out refinance), they may choose to require an appraisal.
Pros and cons of an appraisal waiver
Beyond preventing the spread of coronavirus, appraisal waivers have other perks. Ditching the in-person appraisal means ditching the appraisal fee, which can save homeowners several hundred dollars.
A traditional appraisal also takes time to schedule and perform, which means it takes longer for a loan to close. Closing more quickly means that you can start taking advantage of your refinanced mortgage sooner.
So can a home’s value be accurately calculated without an independent, in-person appraisal? Experts are divided on this issue, although some point out that it’s within a lender’s interests to pinpoint the right price.
“They are lending to you based on what they believe that asset is worth, so they’re going to do everything in their power to get it right,” says Jeremy Sopko, CEO of Nations Lending.
Plus, these days, appraisal software has gotten fairly sophisticated.
“In a waiver situation, lenders truly have it down to a science,” Sopko adds.
An appraisal waiver could also result in a higher estimated home value than a traditional appraisal, which is a good thing for owners who are refinancing. The reason: A traditional appraisal in a volatile housing market creates a lot of uncertainty. As such, there’s a chance the new appraised value of your home will come back lower than you want or, worse, lower than what you paid for your home.
On the flip side, however, there’s certainly a chance a lender’s estimate may come in low. If this happens, though, you can simply request an in-person appraisal with your current lender, or shop around for other lenders who might appraise your home at a higher price.
Plus, your home’s appraised value today may have no bearing on what a potential buyer is willing to pay for it in the future. This value is simply a tool used by lenders to help give context to your loan and help them decide whether it’s a smart choice to loan you money.
As for whether an appraisal waiver is right for you, check out a refinance calculator to get started.
Article by Sarah Kua on realtor.com