What Is An Appraisal Waiver In Real Estate?

Image: Getty Images; Illustration: Bankrate

A home appraisal is an important step in the homebuying process — in fact, if you’re financing your purchase with a mortgage, your lender will likely insist on one. However, in some cases, a lender may choose to waive their appraisal requirement. Why? And is it a good idea for you, the buyer? Read on to learn more about the benefits and risks of appraisal waivers in real estate.

What is an appraisal waiver?

Appraisal waivers allow borrowers who meet certain qualifications to skip the appraisal process when buying a home. For these qualified buyers, instead of requiring a professional in-person appraisal, the lender will typically rely on an automated underwriting system to determine the value of the home.

Being granted an appraisal waiver can save buyers money and time, since they do not have to pay for an appraisal and the closing process could be sped up. However, a professional appraisal is probably the most accurate way of determining a home’s value, so buyers who skip it run the risk of overpaying for the home.

Automated systems produce the best results when there are a lot of near-identical properties being sold around the same time you are buying — for example, in a new condo complex where many units hit the market at once. If you’re buying an older home in an area where all the homes are different, the odds of getting an accurate estimate of value will decline.

How do you qualify for one?

The main necessity to qualify for an appraisal waiver is that you must take out your home loan with a lender who uses the automated underwriting systems run by government-sponsored entities Fannie Mae (their system is called Desktop Underwriter) or Freddie Mac (theirs is Loan Product Advisor).

Waivers can only be granted for purchases of single-unit first or second homes and condos, with limited cash-out refinancing options. They are not available for construction loans, co-ops or purchases totaling more than $1 million.

But there are plenty of other criteria you’ll need to meet, too. You’ll likely need a very high credit score, for example, and a low loan-to-value ratio. You’ll also likely need to put down a down payment of at least 20 percent of the home’s purchase price. In the case of a Fannie Mae loan, they must find a prior appraisal of the property in their database.

Your chances of qualifying are typically higher if the home you are buying has been professionally appraised fairly recently, like in the past year or so. It also helps if you are buying in a neighborhood in which there have been several other recent sales, giving your lender solid comps to examine. Specifics will vary by lender, and some may have more criteria that also must be met.

Benefits and risks of appraisal waivers

Pros

As a homebuyer, getting an appraisal waiver has some advantages:

• Saves money: A waiver means you don’t have to pay for a professional appraisal — they typically cost around $360, according to HomeAdvisor.
• Faster closing: Not having to schedule and wait for an in-person visit, then wait again for the results to be reviewed, can speed up the closing process.
• Convenient for seller: Between open houses and private showings, sellers already have to let a parade of strangers into their home (often while they’re still living there). Letting them avoid another intrusive in-house visit makes their lives easier — and may score you points as a buyer.

Cons

There are potential risks to consider, as well:

• Missed issues: Human appraisers can see (and hear, and smell) things that computer algorithms can’t. In addition, algorithms often rely on public records, which are not always current. Without a live appraiser’s assessment, you could miss a problem (and have to pay for it later).
• Inaccuracy: Algorithms need a large amount of recent data to produce correct results. If there’s not much data available in your market, or if the market is volatile and changing frequently, it could adversely affect the reliability of the results. And if the value of the home turns out to be lower than you thought, you may have trouble refinancing or selling for a profit down the road.
• Overpaying: There’s a risk of paying too much for the home, especially if the sellers haven’t had their home appraised in a while and the market has gone up. An accurate value is also important for insurance purposes, as you don’t want to over- or under-insure your home.

Bottom line

Appraisal waivers can be a beneficial option for some buyers, as they save money on appraiser fees and can simplify the closing process. However, the potential risks, such as overpaying, can be significant. In the end, skipping an in-person appraisal just to save a few hundred dollars can turn out to be penny-wise and pound-foolish — the benefits outweigh the risks.