Fannie Mae and Freddie Mac announced newly expanded appraisal waivers to reduce costs and help more first-time homebuyers purchase a property.
The pair does offer assessment relief on some of the loans they guarantee, but the loan-to-value (LTV) ratio is currently set at 80%.
This means you should have at least a 20% down payment to avoid the cost and potential hassle of a traditional appraisal.
In order to further simplify this process and reduce the burden on low-income borrowers, this number will increase to 90% of the value added starting from the first quarter of 2025.
It will be expanded to include program limits (eg 97% LTV) for more robust inspection-based appraisal exemptions.
You may not need an appraisal to purchase your next home
While appraisal waivers are not entirely new; They were introduced by Fannie Mae in 2016 for refinancing transactions and later expanded to include home purchases in 2017, and are limited in scope.
In other words, many homebuyers still need to pay for the appraisal when they apply for a mortgage.
This results in an additional cost that can range from $400 to $1,000 or more. The home loan process is longer as the appraisal is requested, conducted and submitted.
It can also create uncertainty about the value of the collateral, which can put the loan at risk late in the game if a human appraiser comes back with a value lower than the purchase price.
For these reasons, obtaining an appraisal waiver can be a blessing. What’s not to like? Faster, less stressful loan approval and lower borrowing costs.
But as mentioned earlier, these only apply to loans that borrowers can get with a 20% down payment.
This clearly did not help those most in need, i.e. first-time homebuyers and/or low-income borrowers who could only muster 3-5%.
Well, starting in Q1 2025, these money-saving waivers will expand from a maximum of 80% LTV to 90% LTV/LTV.
So, if you only get a 10% discount on your home purchase, you may soon be able to skip the appraisal, too.
The maximum loan-to-value ratio for purchase loans eligible for inspection-based appraisal exemptions will jump from 80% to 97%.
This means borrowers will be able to get a 3% Home Possible loan from Freddie Mac, or a Fannie Mae HomeReady mortgage without a pre-appraisal.
Understand the different assessment waivers available today
First, I should point out that these appraisal exemptions apply to conventional loans, not government loans like FHA or VA loans.
So only conforming loans backed by Fannie Mae and Freddie Mac are eligible for the appraisal waiver.
Second, there are two different types of evaluative concessions. Let’s talk about direct concessions that rely solely on data and technology to accept the value offered by the lender.
- Fannie Mae is known asAccept value“
- Freddie Mac’s automated collateral evaluation system is known aswitty).
These typically require finding a prior evaluation performed on the subject property in the database.
They are also limited to one-unit properties (including apartments) for primary residences and second homes.
Additionally, there is a $1 million cap on the assessed value (or sales price) of properties that will receive the waiver.
The good news is that there is No fees The borrower has these options, which can save them several hundred dollars or more.
There are also so-called inspection-based valuation exemptions, which will see the maximum VAT increase from 80% to 97%.
These more robust assessment alternatives require that property information be physically collected on site by trained data collectors.
Similar to an appraisal, the original lender arranges the collection of property data, but the result should be lower costs and faster turnaround times.
The cost of an inspection-based appraisal may be half the cost of a traditional appraisal, so maybe $200 or so versus $400 or more.
Does this pose an additional risk to the housing market?
While these changes will likely be welcomed with open arms by mortgage lenders (rather than appraisers), the issue of risk remains.
The collateral value of the property is a big 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 the real reason why Fannie Mae stopped using the phrase “waiver of valuation” and replaced it with acceptance of value.
This change was implemented to better reflect the actual process, which relies on data collection and technology to accept value provided by a lender.
This is no different than a human appraiser, who also uses data collection to come up with an appropriate value that supports the entered price.
But I think there will be some scrutiny, especially since the changes are being introduced at a time when housing affordability has rarely been worse.
Allowing a home buyer to walk away with an appraisal at just 3% down seems a little scary when home prices are at or near all-time highs and have increased by almost 50% in just the past few years.
It also widens the gap between conventional loans and government-backed loans, which are already known to be more difficult to get approved due to inspection/appraisal requirements.
(image: M Kasahara)
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