Are Appraisals Required for Conventional Loans?

Conventional loans are a widely used type of mortgage financing not directly insured or guaranteed by government agencies such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA). These loans are originated and backed by private lenders, including banks, credit unions, and other financial institutions. A property appraisal serves as an independent assessment of a property’s market value. Appraisals are a standard component in securing many conventional loans.

When Appraisals Are Typically Required

Lenders typically require an appraisal for common scenarios such as purchasing a home or refinancing an existing mortgage, including cash-out and rate-and-term refinances with significant changes. The primary reason lenders mandate appraisals is to assess the property’s current market value, ensuring it provides adequate collateral for the loan amount. This step helps mitigate the financial exposure for the lender in case of borrower default. Major investors like Fannie Mae and Freddie Mac generally require appraisals for most conventional loans they purchase or guarantee, ensuring the property’s value supports the loan amount and aligns with their risk management.

Situations Where Appraisals Might Not Be Required

While appraisals are generally expected for conventional loans, there are specific, less common circumstances where a full appraisal might not be necessary. These exceptions often occur in certain refinancing scenarios, such as limited cash-out refinances or streamline refinances. Additionally, loans with very low loan-to-value (LTV) ratios may sometimes qualify for an appraisal waiver.

The concept of an “appraisal waiver,” also known as a “property inspection waiver” (PIW), is often granted through automated underwriting systems (AUS). These systems, like Fannie Mae’s Desktop Underwriter (DU) or Freddie Mac’s Loan Product Advisor (LPA), analyze extensive data, including prior appraisals, market conditions, and property characteristics, to determine if a waiver is appropriate.

Eligibility for these waivers is not automatic and is determined at the discretion of the lender or the AUS, based on the perceived low risk of the transaction. Factors influencing a waiver include a strong borrower credit profile, a substantial down payment (often 20% or more for purchases), and sufficient recent comparable sales data in the area.

The Purpose of an Appraisal

The purpose of a property appraisal for conventional loans is to protect both the lender and the borrower. For the lender, the appraisal provides an independent, unbiased opinion of the property’s market value, ensuring that the loan amount is adequately secured by the collateral. This assessment helps manage the lender’s risk by preventing them from lending more than the property is worth.

The appraisal also safeguards the borrower by providing an objective valuation that helps prevent overpaying for a property. It offers an impartial benchmark, ensuring the agreed-upon price aligns with the fair market value. An appraiser evaluates various aspects of the property, including its physical condition, size, features, and recent sales of comparable properties in the surrounding area, along with prevailing market trends.

This comprehensive evaluation results in a detailed appraisal report. The report confirms the property’s value, which influences decisions regarding the loan amount, interest rate, and other terms offered to the borrower.

Understanding the Appraisal Process

Once a conventional loan application progresses, the lender initiates the appraisal process. The lender is responsible for ordering the appraisal, often through an appraisal management company, to ensure the appraiser’s independence. After the appraisal is ordered, the appraiser typically contacts the property contact within 48 hours to schedule a visit.

During the on-site visit, which can last from 30 minutes to a few hours depending on the property’s complexity, the appraiser conducts a visual inspection of the interior and exterior. They assess the home’s condition, features, size, and any improvements, also taking photographs. Following the inspection, the appraiser researches comparable sales in the area and compiles a detailed report, usually within one to two weeks.

The borrower typically bears the cost of the appraisal, which is part of the closing costs. For a conventional loan, this fee generally ranges from $300 to $500, though it can vary based on location and property specifics. The completed appraisal report is then submitted to the lender, and the borrower is entitled to receive a copy of this report.