Buy a Home Without an Appraisal – A Good Idea?
Both Fannie Mae and Freddie Mac announced that starting September 1st on certain purchase transactions, an appraisal is no longer required. Is this a good idea? That’s the subject of this week’s story.
Technology has made some significant inroads into the mortgage industry over the past few years. Ever since the government took over Fannie and Freddie at the height of the housing crash, they have been collecting home values on every transaction submitted to them. This massive database stores the collective value of a large swath of American homes. Enough data has now been collected to where computer algorithms can now spit out an estimated value of a property with reasonable certainty – at least certainty enough for the government!
Appraisal waivers are not new to the mortgage industry. The housing crisis did give birth to the Home Affordable Refinance Program (HARP). Yes, the same program burned into your brain from repeated commercials on TV and radio for the past 5 years. The concept of program is simple: The government already holds your mortgage. If you weren’t late on your payments, and were just refinancing to get a better rate, who’d care what the value of your home was. Dropping your rate and payment only reduces the risk, so it’s logical to do this.
Last year the appraisal waiver option was expanded to certain refinance transactions. If you had lots of equity, good credit, and sufficient income, the risk was perceived to be small, and an appraisal waiver was given as an option. This is a reasonable approach to lending. With low risk factors to lenders, why force extra costs and time on the consumer.
Now the government, through Fannie and Freddie are getting a little too bold for my liking. On a purchase transaction we’re talking about new debt. The government isn’t on the hook yet. I’m all for technology, but this seems too much of a stretch.
I’ve always advised clients that complained about the cost of an appraisal to look at it as an insurance policy against paying too much. Over my 21 years of providing financing, I’ve seen many an appraisal not meet the sales price. In every one of those situations, I never heard another complaint about the appraisal cost.
I would like your feedback. This newsletter reaches a significant number of real estate agents and consumers. I think the response will differ from each camp. Reply to this newsletter and let me know if you would forego an appraisal in your next home buying transaction. I’ll tally the results and post them in next week’s newsletter.