Nobody likes red tape, so it is understandable that home buyers find an appraisal waiver enticing. After all, skipping the appraisal accelerates the buying process and allows you to start your new life in your new home sooner. Doing so does not come without risks, however, so anyone thinking of bypassing this step needs to look carefully at the pros and cons.
What Is an Appraisal Waiver?
An appraisal waiver expedites the home appraisal process by removing the need for an in-person appraiser. In the short term, this saves the buyer money, as a real estate appraisal does not come cheap and the responsibility for covering the cost falls on the person making the purchase. However, a home appraisal is designed to protect the buyer from overpaying for their home, and so often the upfront savings gained are lost ten times over further down the road.
The lending institution providing your home loan must approve your appraisal waiver. As the ones fronting the cash for the bulk of the purchase, however, they likewise have a vested interest in your home being priced appropriately. This means that they are unlikely to approve your waiver unless you meet specific criteria.
Generally, buyers need a strong credit score and must be purchasing a one-unit property to qualify for a waiver. They may also be asked to provide a down payment of up to 20% of the home’s final purchase price. In addition, they need to apply for a mortgage with a lender that uses an automated underwriting system run by either Fannie Mae or Freddie Mac.
Is an Appraisal Waiver Ever Worth It?
Obtaining an appraisal waiver will save you the few hundred dollars that an in-person appraisal usually costs. It will also reduce the closing time on your home. These benefits rarely, if ever, outweigh this risk of overpaying, however.
When the need for a real estate appraisal is waived, the lender still assesses the value of your home. What changes is that they base their determination on the results provided by an automated system. Fannie Mae and Freddie Mac each use proprietary analytics and deep stores of property data to provide a very-informed estimate of your home’s value. No matter how sophisticated, though, their software can’t spot everything an in-person appraiser can.
Recent renovations or damage, for instance, will be overlooked by the system, as might a sagging foundation, faltering appliances, or other hard-to-spot defects. As a result, Fannie Mae or Freddie Mac may appraise a home at $250,000, for instance, when in reality it is worth much less.
Overpaying for a home is never a good idea. Not only does doing so put you at risk of having to sell at a loss, but it can also complicate your ability to refinance your mortgage, amongst other major drawbacks.
Instead of being lured by the short-lived benefit of an expedited closing, talk to your lender about strategies for gaining a fast appraisal and do your own research on appraisal companies with a track record of quick turn-around times—like us!