In the current hyper-competitive housing market, buyers are doing what they can to set themselves apart, especially when they’re competing against multiple offers, in some cases all-cash offers. A growing number of home buyers are meeting this challenge with a risky strategy: waiving the appraisal contingency. It’s a move that buyers believe will get their offer moved to the top of the pile, but it has its drawbacks.
The waiver program, begun by Fannie Mae in 2017, allows buyers to be approved for a mortgage without an appraisal at all. While appraisal waivers are available to all Fannie Mae lenders, not all transactions are eligible. To qualify, buyers will need a strong credit score and the waiver can only be applied to a one-unit property, such as a single-family home or condominium. Fannie Mae requires that buyers are able to make a down payment of at least 20 percent of the home’s final purchase price to qualify for an appraisal waiver. Any buyers using FHA or VA loans are ineligible for an appraisal waiver, as are any properties in an area that has been impacted by disaster.
In an appraisal waiver, the lender still makes its own determination of the property’s value. Instead of hiring an independent appraiser to evaluate how much the home is worth, your lender will be the one making that assessment. They determine the value based on previously collected data in an online database from Fannie Mae.
The greatest risk in agreeing to an appraisal contingency waiver is that your lender could decide that the house is worth less than what you and the seller have agreed upon. Banks don’t lend borrowers more than the value of a property, so the buyer would then need to find a way to come up with the difference between the purchase price and what the bank says the property is worth. Also, if the buyer decides that the deal doesn’t make sense and walks away, they would lose their earnest money deposit, which is typically about one to three percent of the home’s value.
Paying more than what a home is worth can also create problems further down the road. If you want to refinance your mortgage, lenders typically require that owners have at least 20 percent equity in their homes before they’ll approve them for a refinance. Homeowners who overpaid are less likely to have enough equity to qualify for a refinance, especially if they haven’t made enough monthly mortgage payments to significantly pay down their balance. Another challenge a homeowner in this situation could face is being unable to capture any profit when they sell the house. Granted, if a buyer only spent a little more than the value of the house and they lived there for a long time, this could be a non-issue. But alternately, a buyer could wind up being saddled with a property they no longer want but can’t sell without taking a financial hit.
Ultimately, this is an extremely risky approach. Skipping the in-person appraisal might save buyers the cost of an appraisal, but it can cost them big in the future. Buyer beware.