Do You Need an Appraisal for a Conventional Loan?

Whether an appraisal is necessary for a conventional loan depends on several factors that influence a lender’s decision. While appraisals are common in mortgage transactions, specific circumstances can lead to a waiver of this step. Understanding these nuances is important for anyone seeking conventional financing, as they can impact the loan process’s timeline and cost.

What is a Property Appraisal

A property appraisal is a professional assessment that determines a home’s fair market value. A licensed appraiser conducts this valuation, acting as a neutral third party to ensure objectivity. For lenders, the primary purpose of an appraisal is to confirm the loan amount is justified by the property’s actual worth, safeguarding their investment. The home serves as collateral for the loan, making its accurate valuation essential to the lending process.

Appraisers consider multiple factors when evaluating a property’s value. These include its physical condition, age, size, and features like rooms, bathrooms, and improvements. Location and neighborhood also play a role, as appraisers analyze comparable sales of similar homes in the area. This market analysis helps establish a realistic value based on current trends and recent transactions. The appraiser compiles this information into a detailed report for the lender.

When Appraisals Are Typically Required

Conventional loans typically require a property appraisal to establish the home’s market value. This step is a fundamental part of the loan application process, ensuring the lender has a reliable estimate of the collateral’s worth. Appraisals are mandatory for new home purchases, confirming the sale price aligns with the property’s fair value. This protects both the lender from over-lending and the buyer from overpaying.

For refinances, especially cash-out refinances where the borrower receives funds based on home equity, an appraisal is often required to confirm the property’s current market value and available equity. Loans with a high loan-to-value (LTV) ratio, meaning the loan amount is a large percentage of the property’s value, also frequently necessitate an appraisal, assuring the lender regarding the collateral. Properties with unique characteristics or in less common markets may also require an appraisal due to limited comparable sales data for automated valuation. Lenders use appraisals as a risk mitigation tool, ensuring sufficient collateral and meeting regulatory guidelines.

When Appraisals May Not Be Required

While appraisals are standard for conventional loans, certain conditions can lead to a waiver. An appraisal waiver, also known as a Property Inspection Waiver (PIW) or Value Acceptance, allows a borrower to bypass a traditional in-person appraisal. Government-sponsored enterprises like Fannie Mae and Freddie Mac typically offer waivers through their automated underwriting systems, such as Desktop Underwriter (DU) and Loan Product Advisor (LPA). These systems use extensive data and algorithms to estimate property value, relying on prior appraisals, public records, and market data.

Appraisal waiver eligibility depends on several factors, primarily indicating a low-risk loan scenario. Borrowers with strong credit profiles and stable incomes are more likely to qualify. A key factor is the loan-to-value (LTV) ratio; traditionally, waivers were more common for lower LTVs (e.g., 80% or less). However, for purchases and second homes, Fannie Mae increased the LTV threshold for Value Acceptance to 90% in early 2025, meaning borrowers with a 10% down payment might qualify. For rate-and-term refinances without cash out, higher LTVs, sometimes up to 97%, may also be eligible for waivers.

Sufficient data on the property and market is also crucial. If a property has a recent appraisal on file within the automated underwriting system’s database, or if there is ample comparable sales data in the area, a waiver becomes more probable. Standard single-family homes are generally more likely to receive waivers than multi-unit properties or those with unusual features. The decision to grant a waiver rests solely with the lender and their automated underwriting system, not with the borrower. While waivers can save borrowers time and money, they are not universally granted, and the automated system may still require a traditional appraisal if risk factors like significant property damage or unique local requirements are present.

Steps in a Conventional Loan Appraisal

When a conventional loan requires an appraisal, the process follows a structured sequence. The lender initiates the process by ordering the appraisal, selecting a licensed appraiser from a pool of qualified professionals. Neither the borrower nor the lender can choose a specific appraiser, ensuring impartiality. The appraiser contacts the homeowner or real estate agent to schedule a property inspection.

During the property inspection, the appraiser conducts a thorough review of the home’s interior and exterior. This involves assessing its overall condition, measuring the property, and noting any significant features, improvements, or potential issues such as visible damage or structural concerns. They may take photographs of various rooms and areas to document the property’s state. After the physical inspection, the appraiser performs a market analysis, researching recently sold comparable homes to determine an accurate market value. This includes reviewing public records and real estate databases for relevant sales data.

Once all data is collected and analyzed, the appraiser generates a formal appraisal report, typically the Uniform Residential Appraisal Report, which is sent directly to the lender. The report provides a detailed analysis and the appraiser’s conclusion on the property’s value. The lender reviews this report to ensure the property meets their lending criteria. The borrower is entitled to a copy of this report before the loan closes. Based on the appraisal outcome, the loan process moves forward. The property may appraise at, below, or above the anticipated value, each impacting the loan amount and terms.