The appraisal industry the last year has been introduced to several new methods the Fannie Mae (FMNA) has introduced alongside several other Government Sponsored Enterprises (GSE). These methods are commonly referred to as “hybrid appraisals, bifurcated appraisals, etc…” that are part of FNMA’s new initiative to modernize the appraisal industry with the “Value Verify” program. These strategies involve using a third party to perform certain aspects of the appraisal process. Without getting into the nuts and bolts commonly discussed in the debate of these products, lets just say; they are not a favorite in the appraisal industry.
But how about an appraisal waiver? That’s right, if you are applying for a mtg loan on a purchase or refinance and meet certain credit criteria you may have the option of waiving an appraisal all together. Good news, right? FMNA recently reported that loans delivered with appraisals have defaulted more than three times as often as loans with appraisal waivers. In the rare instances when loans with appraisal waivers have defaulted, the loss severity was about 33% lower than loans with appraisals from the same time frame. This is most likely due to loans that are waived being much less “risky” than the ones that require appraisals.
But what does this actually mean for YOU as a consumer looking for a loan? Sure, you can save a little time and money in the closing process! Before you get too excited, look at your closing disclosure (CD) and see how much you end up paying in closing fees. A typical real estate transaction costs roughly 5% of the contracted amount and lending typically charges approximately 1% of the loan that is being originated (note: there are always other small fees associated). A home closing at a price of $200,000 will typically cost $10,000 to close and an additional $2,000 for the lending transaction. So why pay $400-$500 for an appraisal?
For most people, their home is the most expensive purchase and largest asset they will own in their life time; thus, short cuts are not a good idea. A lender may tell you that you have a high enough credit score to qualify for an appraisal waiver which will save you roughly 3.8% of your closing costs (per the model above) and will close you faster. Awesome news!
But what does your credit score have to do with the value of the asset you are purchasing? Do you have faith that your loan officer and realtor who are collecting a nice commission upon closing your deal have vetted the valuation process? I know many realtors who are well versed in pricing homes and assisting their clients in making sound decisions when buying a home; but these are a small population of the realtor body. How about during a refinance where the only person you deal with is your loan officer?
One’s credit rating for a loan program and what the collateral (real estate) for that mortgage is worth are two VERY different items that should NEVER be grouped together as suggested. Just because you are approved for a loan up to $300,000 does not mean that the property purchase price you have agreed to is worth what the seller is asking. As a buyer would you NOT have a home inspection done because your realtor or loan officer said they thought everything looked and worked correctly in the property?
An appraiser provides (by definition) a third-party unbiased opinion of value; which acts much like an insurance policy. Ironic how we pay for insurance polices to protect us from events we do not want to ever deal with.
Be an informed consumer; if your lender is not requiring an appraisal, you can always provide an insurance policy to yourself by calling a trusted appraiser to give a totally unbiased value opinion before signing the on the dotted line.