Around five percent of Fannie Mae’s 1.2 million home mortgages have met the criteria for not needing a traditional in-person appraisal since new rules were introduced last year, according to the Washington Post. However, Freddie Mac says that it expects no-appraisal mortgages to account for up to 15 percent of all new loans.
Under the new rules, Fannie and Freddie say that they can instead make use of proprietary analytics and data to value homes instead of using a human appraiser. But only some buyers are eligible for the new process. In general, the lenders collect a down payment of at least 20 percent before Fannie and Freddie decide who is eligible.
“If [Fannie and Freddie] have a good basic inventory of information about the house, its value, and what it sold for, you’re more apt to get a property inspection waiver,” Don Frommeyer, a mortgage originator at Marine Bank in Indianapolis, told realtor.com. However, “the longer it hasn’t been appraised, the more apt you are not going to get a property inspection waiver.”
The idea is that bypassing the appraisal process helps to save homeowners money, as the average costs amount to around $500 per appraisal. However, some expert say that even if buyers do qualify for the new program, it may not be worthwhile.
“It can save buyers money, but it can potentially lead to them overpaying if they don’t have that second opinion in the appraisal,” Danielle Hale, realtor.com’s chief economist, said. For example, if the appraisal comes in lower than a buyer’s offer, the buyer may be able to renegotiate. “But many markets are so hot right now that buyers may not be able to negotiate the price anyway, even if an appraisal came back too low.”
There are also doubts about the accuracy of the automated appraisals, said Ryan Lundquist, an appraiser who’s based in Sacramento, California. He told the post that Fannie and Freddie’s algorithms “cannot smell 20 cats living at the property”, and that they can’t beat an old-fashioned appraisal carried out by a human inspector. “They won’t be able to identify problems that could potentially lower the value of the home,” he said.
The new rules may be more beneficial for those who are refinancing, experts Hale said. Lenders may also prefer the option too.
“We think it’s great for borrowers,” Mat Ishbia, president and CEO of United Wholesale Mortgage, told the Washington Post. “It saves time and money” and leads to shorter timelines for locking in interest rates and closing transactions, he said. He adds that over 10 percent of the lender’s home loans are now appraisal-free.