Here’s something that may finally speed up the typically slow home loan process: an appraisal-less home purchase.
Yep, it’ll be a reality for some folks come September thanks to a new initiative by Freddie Mac.
First a little background. The dreaded home appraisal, which can take weeks to complete, is often an item that turns what could be a two-week process into a month-long one.
Of course, buyers and sellers aren’t always in that big of a rush. And one could argue that an independent valuation is good for all parties.
That stuff aside, an appraisal waiver will save the homeowner money because they won’t have to pay for one in certain situations. How much they save depends on what the lender charges, but it could be $500 or more.
Freddie Mac’s Automated Appraisal Alternative
You might be wondering how Freddie Mac will be able to forego an appraisal, seeing that it’s a pretty important piece of the mortgage qualification pie.
After all, lenders are lending out a lot of money, so they can’t just take the seller’s or borrower’s word for it that the home is worth X.
That’s where big data comes in. The government-sponsored enterprise refers to their tool as an “automated appraisal alternative.”
What that means in layman terms is that Freddie will use some fancy algorithms to determine if an appraisal is even necessary using its automated collateral evaluation (ACE).
The ACE tool analyzes data from multiple listing services (MLS) aka for-sale listings, public records, and “a wealth of historical home values” to help determine collateral risk.
So I guess that means if the purchase price is in-line with what comparable homes in the area have been selling for recently and historically, Freddie Mac may give you and your lender a free pass.
As noted, that could save you several hundred dollars and make it a lot easier to close on time, or even early.
If it turns out that the home value provided by the lender is “acceptable,” Freddie Mac’s ACE will spit out a decision, providing the lender with immediate representation and warranty relief related to the property value.
That means lenders can originate loans backed by Freddie Mac with less fear of a repurchase request, at least with regard to the condition and marketability of the property.
ACE has actually been available for certain refinances since June 19th, and will be available for home purchases starting on September 1st.
My only fear is that everyone will want to avoid the appraisal requirement going forward.
The impact on individual (human) appraisers is also a negative for that industry, though if it speeds up the process tremendously and saves borrowers money it might be time for a change.
What Transactions May Qualify to be Appraisal-Free?
Note that while Freddie has introduced this technology, the bulk of both home purchases and refinances will continue to require an appraisal. Yes, you read that right.
To illustrate, the appraisal waivers that were introduced on refinance transactions earlier this summer are only good on rate and term refinances with LTVs of 80% or less. That means 20% down or a sizable equity stake is necessary.
Also, cash-out refis are not eligible, perhaps for obvious reasons…
Additionally, the property has to be a one-unit owner-occupied or second home, no multi-unit properties, condominiums, or investment properties permitted.
In other words, in most cases when you apply for a mortgage, whether it’s a purchase or a refinance, expect your lender to order an appraisal and make you pay for it. At least for now.
But this is a big step forward in terms of greatly reducing the lengthy mortgage process we’ve all come to know and love.
Fannie Updates Its Guidelines Too
For the record, Fannie Mae implemented a similar program late last year, though it doesn’t apply to home purchases and also has many limitations similar to Freddie’s offering.
Well, now it does. The pair tend to follow one another if the other makes a change, and so Fannie Mae released an update pertaining to appraisal waivers on purchases.
As of August 19th, purchase transactions will now be eligible for a Property Inspection Waiver (PIW), their version of appraisal-less mortgage.
Eligible purchase transactions include the following:
- One-unit properties including condos
- Primary and second homes with LTV/CLTV up to 80%
- Loan casefiles that receive an Approve/Eligible recommendation in DU
- Property value must be under $1 million
The following purchase transactions will not get a free pass:
- Investment properties
- 2-4 unit properties
- Properties in disaster-impacted areas
- Construction and construction-to-perm loans