Both Fannie Mae and Freddie Mac announced newly expanded appraisal waivers to reduce costs and help more first-time home buyers purchase a property.
The pair already offer appraisal waivers on some of the loans they guarantee, but the loan-to-value ratio (LTV) is currently capped at 80%.
This means you must come in with a least a 20% down payment to avoid the cost and potential hassle of a traditional appraisal.
To further streamline this process and ease the burden on lower-income borrowers, this number will increase to 90% LTV beginning in the first quarter of 2025.
And it will be expanded to the program limits (e.g. 97% LTV) for their more robust inspection-based appraisal waivers.
You Might Not Need an Appraisal for Your Next Home Purchase
While appraisal waivers aren’t all that new; they were introduced by Fannie Mae in 2016 for refinance transactions and later expanded to home purchases in 2017, they’re limited in reach.
In other words, many home buyers still need to pay for an appraisal when they apply for a mortgage.
This results in an added cost, which can range from say $400 to $1,000 or more. And a longer home loan process as the appraisal is ordered, conducted, and submitted.
It can also lead to uncertainty regarding the collateral value, possibly jeopardizing the loan late in the game if the human appraiser returns with a value below the purchase price.
For these reasons, receiving an appraisal waiver can be a blessing. What’s not to like? A faster, lower-stress loan approval and reduced borrowing costs.
But as mentioned, these only applied to loans where borrowers were able to come in with a 20% down payment.
This clearly didn’t help those most in need, namely first-time home buyers and/or lower-income borrowers who could only muster 3-5% down.
Well, beginning in the first quarter of 2025, these money-saving waivers will be expanded from an 80% maximum LTV to 90% LTV/TLTV.
So if you come in with just 10% down on your home purchase, you might soon be able to skip the appraisal too.
And the maximum LTV ratio for purchase loans eligible for inspection-based appraisal waivers will jump from 80% all the way to 97%.
This means borrowers will be able to get a 3% down Home Possible loan from Freddie Mac, or a Fannie Mae HomeReady mortgage without the appraisal.
Understanding the Different Appraisal Waivers Available Today
First off, I should note that these appraisal waivers apply to conventional loans, not government loans such as FHA loans or VA loans.
So only conforming loans backed by Fannie Mae and Freddie Mac qualify for an appraisal waiver.
Secondly, there are two different types of appraisal waivers. Let’s talk about the straight up waivers that rely solely on data and technology to accept the lender-provided value.
- Fannie Mae’s is known as “Value Acceptance”
- Freddie Mac’s is known as automated collateral evaluation (ACE).
These typically require that a prior appraisal that was conducted on the subject property be found in the database.
They are also limited to one-unit properties (including condos) for primary residences and second homes.
In addition, there is a $1 million maximum estimated value (or sales price) for properties to receive the waiver.
The good news is there is no fee to the borrower for these options, which could save them several hundred dollars or more.
There are also so-called inspection-based appraisal waivers, which will see their maximum LTV increase from 80% to 97%.
These more robust appraisal alternatives require property information to be physically collected on-site by trained data collectors.
Similar to an appraisal, the originating lender arranges for property data collection, but the result should be decreased costs and faster turn-times.
The cost of an inspection-based appraisal might be half the cost of a traditional appraisal, so perhaps $200 or so vs. $400 or more.
Does This Introduce Added Risk to the Housing Market?
While these changes will likely be welcomed with open arms by mortgage lenders (and not so much by appraisers), there is the question of risk.
The collateral value of the property is a huge part of the equation when underwriting and approving a loan.
If home appraisals are waived, one could argue that the loan is inherently riskier.
However, this is actually why Fannie Mae stopped using the phrase “appraisal waiver” and replaced it with Value Acceptance.
That change was implemented to better reflect the actual process, which relies upon data collection and technology to accept the lender-provided value.
This isn’t dissimilar from a human appraiser, who also uses data collection to come up with an appropriate value that supports the entered price.
But my guess is there will be some scrutiny, especially as the changes are being introduced at a time when housing affordability has rarely been worse.
Allowing a home buyer to forgo an appraisal when putting just 3% down sounds a little scary when home prices are at/near all-time highs and have increased ~50% in just the past few years.
It also widens the gap between conventional loans and government-backed loans, the latter of which are already known to be more difficult to get approved for due to inspection/appraisal requirements.
(photo: m kasahara)
