Believe It or Not, Home Appraisals Are Not Always Required.
Home appraisals are important for buyers and protect them in the long run. The appraisal will make sure you are paying a fair price and it also protects your mortgage lender against financial losses.
Home appraisals can also be a hassle to deal with. They can be an extra-large cost for the buyer and can leave the sellers worrying about the results. Because of this, multiple government agencies recently started doing away with home appraisals for homes selling for less than $400,000.
This new change doesn’t always apply to major lenders, they still may require an appraisal for a house under $400,000. If you are trying to save costs the best thing to do is compare rates and choose the best lender.
If you are presented with the option of skipping the home appraisal, should you?
The Pros, Cons, and Costs of Home Appraisals
Before you make up your mind on whether or not to get the appraisal, you should understand how it can impact your home-buying process.
The appraisal is there to check that the seller didn’t overvalue the price of the home. A licensed appraiser will compare the home to similar local comps, inspect the property, and come up with a fair market value.
The costs associated with appraisals can be significant, and the buyer is usually responsible for the costs. HomeAdvisor did a study in 2019 to find the average appraisal price ranged from $300 to $400.
Appraisals also protect the buyer. If the appraisal shows that the house is overpriced, the amount saved could be more than the amount of the appraisal. So, is it worth skipping the appraisal?
Who Is Eligible to Skip the Home Appraisal?
The OCC, FDIC, and Fed passed a new rule saying any home under $400,000 could potentially skip the home appraisal.
Before this new rule, the previous amount to skip the home appraisal was $250,000, an amount that hasn’t changed since 1994. This new adjustment was to account for the appreciation in housing over the last 25 years.
Because the exemption is being raised by $150,000, this can have an impact on appraisals. In 2017 there was HMDA data that showed 72% of mortgage transactions fell under that amount.
Still, most of those sales will not end up being authorized without an appraisal. This is because big mortgage lenders always want the appraisal. Regardless of what is mandated, lenders want to protect themselves against loss in case the borrower defaults.
A recent five-year review showed that lenders still required appraisals for 74% of properties that were under the $250,000 threshold.
Don’t expect to get out of an appraisal just because you are purchasing a home valued under $400,000. The good news is you are more likely to be able to skip the appraisal if you are refinancing instead of buying.
What’s the Point of the Exemption if Most Lenders Still Require an Appraisal?
The agencies that lobbied for this rule change said it put more burden on lenders and buyers in terms of transaction costs and times.
Proponents are hoping the new change will reduce closing costs and make the home-buying process faster.
In doing so, we can see an aspect of consumer choice and technology spilling into the mortgage industry.
Even though some mortgages are exempt from an official appraisal, they will still need to be looked at for pricing fairness.
In some situations, an automated valuation model (AVM) can be used in place of a home appraisal with the buyer’s consent. Some worry that without physically going through the property, you will not get the right value. Others are worried that if you go the evaluation route, buyers can end up paying more.
Don’t worry, all evaluations that are in place of appraisals are mandated to meet guidelines for “safe and sound banking practices.” The evaluation models can be a more efficient and cheaper way to determine home values.
Can an Appraisal Impact Your Mortgage?
When going through the mortgage process, it is very common to deal with appraisals. Appraisals are beneficial in many ways.
Even though buyers and sellers may come to terms with a certain sale price, that is not enough for mortgage lenders. They want a professional to value the property. Appraisers are paid for the act of valuing a property, not for finding a value.
Once lenders have a sale price and appraised value, they will make loans for whichever value is lower. Lenders do this to make sure borrowers have enough of their own funds invested into the loan.
Some Fannie Mae loans have a requirement of 3% down. The borrower needs to invest 3%, so it makes the loan safer for the lender. If there is a $100,000 property that is appraised at $110,000, and if the loan is based on a higher value, the borrower wouldn’t have to put any money down and that is more risk to the loan.
Home appraisals can also cause some issues during the closing process. The National Association of Realtors says home appraisal issues are responsible for 16% of delays. These types of issues can be caused when an appraisal values the home under the sale price. When this happens, both parties have to agree on an adjustment.
Do Mortgage Borrowers Need Appraisals?
As a borrower, an appraisal can have pros and cons.
Buyers may want a home appraisal to make sure they are not overpaying for a home. This makes them a very important form of consumer protection.
One bad thing about appraisals is they can cost hundreds to thousands of dollars. This is all during a time when a borrower has a lot of other expenses and may not have extra funding on hand. This is one reason home buyers do not like them.
What Does This All Mean for You?
If you are in the home buying process, should you skip the home appraisal given the opportunity?
If you are looking at it from a financial perspective, you might answer yes. The lender can obtain an evaluation, which is another safety net to protect you from overpaying the purchase price.
If you do not feel comfortable with the evaluation method offered, you always have the option to go with the traditional appraisal.
The most important thing is to make sure you feel absolutely good about the sale price, including your closing costs and final mortgage rate.
