Normally during the home loan process, the lender will require an appraisal of the home. The bank needs to know that the home is worth at least as much as the requested loan. The purchaser wants to know this too! The bank wants to protect themselves in the unfortunate event the buyer defaults on the loan. If the buyer stops making payments, the bank may foreclose on the home in order to sell it and recoup funds. So, to protect against fraud and to safeguard their investment, they require an appraisal be done. An appraisal is done by a licensed appraiser to document the current market value of a home.
Sometimes, the loan officer will notify the buyer that they have qualified for an appraisal waiver. What does this mean? Why would they do that? First, you’ll need to understand who Fannie Mae is and how they influence that decision.
Who is Fannie Mae?
Fannie Mae is the government-sponsored enterprise that essentially backs most home loans. To ensure their loans will be guaranteed by Fannie Mae, lenders follow strict guidelines and criteria for lending. If the loans meet these standards, they are more marketable and therefore more valuable to the bank.
Given the amount of loans that they handle, Fannie Mae has a data bank of many thousands of appraisals. If that data shows the estimated home value well above the loan amount, then the lender may opt to waive the in-person appraisal requirement. There must be substantial recent sales data for similar homes in similar condition in the same area. A waiver can save the buyer hundreds of dollars in appraisal fees, as well as save time in the contract process. If a home is not surrounded by recent comparable sales that support the sales price, a standard appraisal will be required by the underwriter. An appraisal may also be required if there are questions about the condition of the property. Though even if the data is available, that does not necessarily mean the appraisal requirement will be waived. There are other criteria to be met.
Here is a video from Fannie Mae explaining the appraisal data and analysis:
When might a Waiver be offered?
For a waiver to make sense, there needs to be lower risk to the lender. So, buyers must be well qualified and the loan amount will likely be substantially less than the purchase price. In that case, the lender already has a bit of ‘cushion’ between the loan amount and the sales price. The home needs to qualify as well, so no material concerns about the condition of the property. Generally, to qualify for an appraisal waiver, buyers need to have strong credit scores, be putting at least 20% down, and using Fannie Mae automated underwriting. This means that almost all financial documentation has been provided, verified, and Approved upfront before the appraisal is ordered.
Of course, talk to your personal loan officer. The possibility of a waiver is different for every lender and every type of financing. The lender is under no obligation to offer a waiver. They may feel the home requires an in-person visit to determine its condition and/or value. Also, buyers are not obligated to waive the appraisal. They may feel it is worth the fee (estimate $500-$650) to have an appraiser go out and visit and inspect the home in person. Appraisals are intended to protect both the buyer and the bank, so always consider the potential risk versus the cost savings. As always, talk to your lender for more details and a further understanding of the process.