Do Conventional Loans Require an Appraisal?

A conventional loan, a common mortgage type not backed by government agencies, typically requires property valuation. For these loans, the property being financed serves as collateral, making its assessed value a central concern for lenders. A property appraisal is a professional, independent assessment conducted to determine this value, ensuring the loan amount aligns with the asset’s worth. This process is a standard step in securing a conventional mortgage.

Why Appraisals Are Required

Lenders require appraisals for conventional loans primarily to mitigate financial risk. The appraisal provides an unbiased opinion of the property’s market value, which is essential because the lender’s investment is secured by the property itself. If a borrower defaults on the loan, the lender may need to sell the property to recover their funds, and the appraisal confirms there is sufficient collateral to cover the loan amount.

Beyond protecting the lender, appraisals also offer a safeguard for the borrower. They prevent a buyer from overpaying for a property by ensuring the purchase price does not significantly exceed its true market value. This independent valuation helps maintain stability in real estate transactions and prevents inflated property values.

How Appraisals Are Conducted

A licensed appraiser conducts the property appraisal, following a structured process to determine an accurate market value. The appraiser begins by inspecting the property’s interior and exterior, noting its condition, size, features, and any improvements. This visual assessment includes examining the number of rooms, bathrooms, quality of finishes, and structural integrity.

A primary methodology used is the sales comparison approach, where the appraiser identifies recently sold properties, known as comparables or “comps,” that are similar to the subject property in location, size, and characteristics. These comparable sales typically occurred within the last six months and are located within a close proximity, usually a few miles, to ensure relevance. Adjustments are then made to the comparable sales prices to account for differences between them and the subject property, such as lot size variations, upgrades, or differing conditions. The appraiser provides an impartial opinion of value, operating independently of the buyer, seller, and real estate agents.

Navigating Appraisal Results

Once the appraisal report is delivered, the appraised value can significantly impact the loan process. If the appraised value matches or exceeds the agreed-upon purchase price, the transaction typically proceeds without issue. However, a common scenario involves the appraisal coming in lower than the purchase price, which means the lender will generally not finance more than the appraised value of the home.

In such cases, several options become available to the buyer and seller. The buyer might negotiate with the seller to lower the purchase price to align with the appraised value. Alternatively, the buyer could choose to increase their cash down payment to cover the difference between the lower appraised value and the original purchase price. If a mutually agreeable solution cannot be reached, and the purchase agreement includes an appraisal contingency, the buyer typically has the option to withdraw from the sale without losing their earnest money deposit.

Scenarios Without a Full Appraisal

While a full, in-person appraisal is standard for conventional loans, certain situations may allow for an appraisal waiver. These waivers, often offered through Automated Underwriting Systems (AUS), can expedite the loan process and reduce costs for the borrower. An appraisal waiver means a physical appraisal is not required; instead, the lender relies on existing data and proprietary models to estimate the property’s value.

Eligibility for an appraisal waiver is determined by various factors, including a low loan-to-value (LTV) ratio, strong borrower credit, and sufficient historical data on the property or similar properties in the area. Waivers are typically more common for refinances or transactions with substantial down payments. However, certain properties or loan types, such as multi-unit residences, new construction, or properties requiring significant repairs, may be ineligible for waivers. Even with a waiver, lenders may sometimes require an alternative valuation, such as a property data report that includes an interior and exterior inspection by a trained professional, to ensure the property’s condition aligns with expectations.