You might be able to skip the home appraisal

Home appraisals aren’t Always Required

An appraisal is a crucial part of home buying. Appraisals ensure that buyers pay fair prices and protect the mortgage lender from potential losses.

Home appraisals can be a burden. They’re an added cost for the buyer and often a source of worry for sellers and brokers.

A few government agencies have recently adopted a rule that no longer requires home appraisals for homes sold for less than $400,000 to reduce this burden.

Don’t forget to check with major lenders before you call to cancel your appraisal. They will still likely require them for sales below $400,000 You can save money by comparing rates and choosing the most competitive lender.

But if you have the option to skip a home appraisal and save a few hundred dollars — should you do it?

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Home appraisals 101: What are the pros, cons and costs?

Before thinking about whether to opt in or out of a home appraisal, it’s important to understand what actually goes on at this stage of the home buying process.

In short, an appraisal verifies the seller hasn’t overpriced the home. A professional appraiser will inspect the property, compare the price tag to other “similar” homes in the area, and come up with a fair market value to compare to the sale price.

Appraisals are generally paid for by the buyer — and the cost is significant. According to a 2019 study by HomeAdvisor An appraisal typically costs between $311-$404.

However, appraisals can also be used to protect the buyer. An appraisal that reveals an unreasonably high sale price could help the buyer save more than $300-$400. Would it not be worthwhile to skip one?

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Who can miss the home appraisal?

According to the Fed, the OCC, FDIC and FDIC have now passed a new rule that allows home sales below $400,000 to be exempted from an appraisal.

The previous no-appraisal limit was set at $250,000 — which hadn’t changed since 1994. The higher limit was set to account for the increase in housing prices over the past 25 years.

The theory is that raising the exemption threshold from $250,000 to $400,000 could have an enormous impact on home appraisals. Data for HMDA According to 2017 data, about 72 percent of mortgage transactions fell below this threshold.

However, the majority of home sales won’t go through without an appraisal.

Historical data shows that even when appraisals aren’t required, mortgage lenders still enforce them most of the time anyway.

Why? Mainstream mortgage lenders will almost always require an appraisal, whether or not it’s mandated by law, because it can protect them against loss in case the borrower defaults.

Actually, Review after five year sit was found that lenders were still able to obtain appraisals for 74% of properties that were technically exempt even though they were below the $250,000 threshold.

So even if you’re buying a home priced under $400,000 in the near future, don’t expect to have an automatic get-out-of-appraisal-free card.

If you’re refinancing instead of buying, the likelihood you’ll be able to skip the appraisal is much higher.

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If most buyers won’t be exempt from appraisal anyway, then what’s the point?

Agencies that lobbied for this rule change argue that the appraisal requirement, which hasn’t changed in more than 20 years, has placed an “increased burden on [lenders] and consumers in terms of transaction times and costs.”

Proponents believe that the new rule will speed up the process of buying a home and reduce closing costs.

There’s also an element of consumer choice and technology creeping into the mortgage industry here.

Mortgages exempt from an official appraisal still need to be “evaluated” for pricing fairness.

In certain cases, that evaluation can be done electronically with an “automated valuation model” (AVM) instead of a home appraisal — but only with the buyer’s consent.

Will you be able to get the correct value without someone actually going through the property? There are concerns that buyers who use the evaluation process could overpay.

However, all evaluations that replace appraisals are required to meet guidelines for “safe and sound banking practices.” Many argue that such evaluation models are a cheaper and more efficient way to determine home value.

What appraisals can do for your mortgage

Appraisals and mortgages are like salt and pepper. Appraisals are important in many ways.

First, while buyers and sellers may agree on a sale price, that’s not enough for lenders. Lenders want an independent professional to estimate the property’s value. This means that appraisers get paid for the act and not for determining a property’s value.

Lenders will approve loans based upon the lesser of the sale price or appraised value. This conservative approach is taken by lenders to ensure that buyers have sufficient funds for the loan program.

Lenders will lend based on the lower of the two values once they have a sale price or an appraised one.

Fannie Mae loans require a minimum of 3% down. Lenders are safer because the buyer will have a 3 percent down payment. However, a $97,000 property would be appraised at $100,000. The buyer would need to put zero down if the loan amount is based on that higher value. This increases the risk of the loan.

But appraisals can also cause problems in the closing process. Data taken from National Association of Realtors. About 16% of closing delays are caused by appraisal problems. These problems usually arise when a home’s value is lower than its selling price. Sellers and buyers must agree on an adjustment.

Are mortgage borrowers really entitled to appraisals?

Appraisals can be a boon or a curse for borrowers.

Appraisals are a way for borrowers to avoid overpaying for property. In effect, they’re an important form of consumer protection.

Standard appraisals can cost hundreds of dollars, which is a significant expense when there are many expenses for borrowers and money can be tight. Many home buyers might not find them appealing.

What does it mean for you?

So, if you’re given the chance, should you skip the home appraisal?

It could save you money if it is true. Lenders are required by law to obtain at least an evaluation. This provides a safety net in case you end up paying more than necessary.

If you’re not confident in the evaluation method offered, then go with the traditional appraisal.

The most important thing at the end of it all is to feel confident about the sale price and your closing costs.

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