Pros and Cons of Bypassing an Appraisal

May 21, 2018

Since mortgage giants Fannie Mae and Freddie Mac announced last year special rules for when a property does not need a traditional in-person appraisal, only about 5 percent of Fannie’s 1.2 million home mortgages—or 60,000—have qualified, The Washington Post reports. Freddie estimates that, eventually, no-appraisal mortgages will account for up to 15 percent of its new loans. 

In some transactions, Fannie and Freddie are relying on proprietary analytics and property data to value homes rather than sending an appraiser to inspect it. But not every buyer is eligible to bypass the in-person appraisal. Generally, banks collect a down payment of at least 20 percent, and then Fannie and Freddie identify which properties are eligible. 

“If [Fannie and Freddie] have a good basic inventory of information about the house, its value, and what it sold for, you’re more apt to get a property inspection waiver,” Don Frommeyer, a mortgage originator at Marine Bank in Indianapolis, told realtor.com®. However, “the longer it hasn’t been appraised, the more apt you are not going to get a property inspection waiver.” 

Bypassing the in-person appraisal could save home buyers money; the average cost of a traditional in-person appraisal is $500, according to Fannie. But real estate experts warn that even if they are eligible, home buyers may not want to bypass the appraisal. “It can save buyers money, but it can potentially lead to them overpaying if they don’t have that second opinion in the appraisal,” says Danielle Hale, realtor.com®’s chief economist. For example, if the appraisal comes in lower than a buyer’s offer, the buyer may be able to renegotiate. “But many markets are so hot right now that buyers may not be able to negotiate the price anyway, even if an appraisal came back too low.”

For borrowers who are refinancing, they may find bypassing an appraisal worth it, Hale says. Some lenders may like the option, too. “We think it’s great for borrowers,” Mat Ishbia, president and CEO of United Wholesale Mortgage, told the Post. It “saves time and money” and leads to shorter timelines for locking in interest rates and closing transactions. More than 10 percent of the lender’s home loans are now appraisal-free, Ishbia says.

But not all are convinced that no-appraisal loans are a good move for home buyers. Fannie and Freddie’s computer programs “cannot smell 20 cats living at the property,” Ryan Lundquist, an appraiser based in Sacramento, Calif., told the Post. “They won’t be able to identify problems that could potentially lower the value of the home.”

Source: “In-Person Home Appraisals Won’t Be Required for Some Loans: Should You Get One Anyway?” realtor.com® (May 18, 2018) and “Fannie and Freddie Approve Thousands of Loans With No Formal Appraisals,” The Washington Post (May 2, 2018)