Do Conventional Loans Require an Appraisal?

Conventional loans are mortgage loans not insured or guaranteed by government entities. Private lenders like banks and credit unions offer these loans. When pursuing a conventional loan, a home appraisal is typically a required step in the loan application process. This appraisal assesses the property’s market value to determine its worth.

Purpose of Appraisals in Conventional Loans

A home appraisal protects both the lender’s investment and the borrower’s financial interests. Lenders rely on the appraisal report to ensure the property’s value is sufficient to cover the loan amount, minimizing their risk. If a borrower defaults, the property acts as collateral, and its appraised value confirms it can recoup the loan.

For the borrower, the appraisal helps prevent overpaying for a property. It provides an objective assessment of the home’s fair market value. This ensures the mortgage amount aligns with the property’s actual worth, offering peace of mind to the buyer.

The Appraisal Process

Once a purchase offer is accepted or a refinance initiated, the lender arranges for a licensed appraiser to conduct the valuation. The appraiser schedules a visit to the property. During this visit, the appraiser inspects both the interior and exterior of the home.

The appraiser evaluates several factors to determine the property’s market value. These factors include the home’s condition, size, layout, upgrades, location, lot size, and overall suitability for residential living.

Analyzing comparable sales, often called “comps,” is a key component of the appraisal. Appraisers research recent sales of similar properties in the immediate neighborhood. This data helps them gauge current market trends and arrive at a fair market value. The appraiser then compiles this information into a detailed appraisal report, which is submitted to the lender. This report influences the lender’s decision regarding the loan amount, interest rate, and terms.

When an Appraisal May Not Be Required

While appraisals are a standard requirement for conventional loans, certain scenarios allow for an appraisal waiver. An appraisal waiver lets borrowers bypass the in-person appraisal process. This option saves time and money by eliminating appraisal fees, which range from $300 to $500.

Automated underwriting systems used by government-sponsored enterprises like Fannie Mae and Freddie Mac often determine eligibility for an appraisal waiver. These systems analyze factors like the borrower’s credit score and loan-to-value (LTV) ratio. A strong credit profile and a substantial down payment, or significant equity for refinances, increase the likelihood of qualifying.

Appraisal waivers are available for single-unit properties, such as single-family homes or condominiums. They may also be offered if the property was recently appraised or if there is ample local market data from recent sales. Certain streamlined refinance transactions can also qualify for a waiver.

Addressing a Low Appraisal

If a property appraises for less than the agreed-upon purchase price, it can present a challenge. In such cases, the lender will base the loan amount on the lower of the purchase price or the appraised value. This situation, often called an “appraisal gap,” requires action from the buyer and seller.

One option is to negotiate with the seller to reduce the sale price to match the appraised value. Alternatively, the buyer might pay the difference between the appraised value and the purchase price out of pocket. This involves increasing their down payment.

Another course of action is to challenge the appraisal by requesting a reconsideration of value from the lender. This involves reviewing the appraisal report for factual errors, such as incorrect property details or inappropriate comparable sales. Providing supporting evidence, like overlooked upgrades or more relevant comparable properties, can strengthen the request. If these options are not viable, a buyer may consider changing their loan structure, such as exploring a loan with a lower down payment. As a last resort, the buyer can walk away from the deal without penalty if an appraisal contingency was included in the purchase agreement.