Mortgage Q&A: “Does a refinance require an appraisal?”
A reader recently asked if they needed an appraisal in order to refinance their existing loan.
As with anything in the mortgage realm, it depends. Mainly, it depends on the type of loan you plan to refinance. The type of refinance (rate and term vs. cash out) can also come into play.
And nowadays, there are a number of programs that do not require an appraisal to refinance, partially because of sinking home values.
Do HARP Refinances Require an Appraisal?
- If you refinance under HARP
- A home appraisal often isn’t necessary
- Because a lower interest rate means less risk (lower payment)
- Regardless of the LTV
First things first – those who refinance under HARP do not need an appraisal (in most cases). This guideline was changed back in late 2011 by the FHFA to “reach more borrowers.”
Basically an appraisal isn’t necessary if a “reliable AVM” estimate is provided. AVM stands for “automated valuation model,” and is a computer’s approach to your home’s value.
In short, the FHFA doesn’t care as much about your current appraised value because you’re only refinancing to take advantage of a lower mortgage rate, and thus a lower monthly mortgage payment.
The logic here is that the same borrower with a lower mortgage payment is less likely to default on their loan, so it’s a win for all parties involved, less the old investor of the loan with the higher interest rate.
But because the default risk goes down with the refinance, an appraisal isn’t necessary if the computer determines the refinance is eligible for an appraisal waiver.
This program is reserved for those with loans backed by Fannie Mae or Freddie Mac.
Borrowers must be current on their loans (one late payment permitted in past 12 months, none in past six) and the loan must have been sold to Fannie or Freddie on or before May 31, 2009.
FHA-to-FHA Refinance Doesn’t Require an Appraisal
- You can also avoid the appraisal requirement
- If you do a streamline refinance via the FHA
- But if you want to roll costs into the loan
- An appraisal is required
This program doesn’t require an appraisal either, for the same reasons mentioned above.
Instead, the FHA uses the original purchase price of your property, or the most recent appraised value.
The general thought process is a borrower with a mortgage already insured by the FHA that is reducing their monthly payment is going to default at a much lower clip.
However, you must prove a “net tangible benefit,” accomplished by refinancing from an ARM to a fixed mortgage, or by lowering the principal and interest payment (plus annual MIP) by at least five percent.
This is a great way to refinance if your property has decreased in value, resulting in an otherwise ineligible LTV ratio.
You must be in good standing on your existing loan, with no more than one late payment in the past 12 months (all mortgage payments for the three months prior to the date of loan application must have been paid within month due).
And you must have made at least six payments on your existing FHA loan.
Note: If you choose to roll closing costs into the new loan, an appraisal is required.
And if you want to streamline refinance an FHA loan tied to an investment property, it must be done so without an appraisal.
No Appraisal Needed for VA IRRRL
- You can also forego the appraisal with a VA streamline
- But certain rules apply
- Including the need to lower payments
- And being current on your loan
Another popular type of loan that does not require an appraisal is the VA’s “IRRRL.” Yes, there are lots of “R’s” involved, but those very letters help you forego the need for an appraisal.
IRRRL stands for “Interest Rate Reduction Refinance Loan,” which means the rate should be reduced via the refinance.
However, if you’re refinancing from an adjustable-rate mortgage to a fixed mortgage, the rate is permitted to increase.
You must have no more than one 30-day late in the preceding 12 months, and you may NOT receive any cash via the transaction.
USDA Eliminated Appraisal Requirement for Refis
- You can also avoid the appraisal requirement
- If you go the USDA loan route
- As long as you’re current on your existing USDA loan
- But the new mortgage rate must be at least 1% lower
At this point, you’re probably wondering if appraisers are out of a job…
About a year ago, the USDA announced, “Streamlined Refinancing for Rural America,” which allows borrowers with USDA loans to refinance without the typical requirements.
As long as borrowers are current on their existing USDA loans (on time payments for 12 consecutive months), they can refinance to a lower rate with no need for an appraisal, property inspection, or a credit report.
However, the new mortgage rate must be at least one percent below the old rate, no cash out is permitted, and the mortgage term cannot exceed 30 years.
So that’s basically it. If you’re looking to get cash out via your refinance, an appraisal will likely be required. And traditional rate and term refinances also require appraisals.
Also note that some lenders may require appraisals as part of their own underwriting processes, so be sure to shop around to find a competitive lender that doesn’t require one if that’s what you’re looking for.
FYI: Fannie Mae’s Homepath program, which is a special purchase program for the company’s REO inventory, does not require an appraisal either.
Instead, the purchase price is used to come up with the property value. However, borrowers are urged to order an appraisal to ensure they don’t overpay for the home.
Read more: When to refinance your mortgage?