Does a Conventional Loan Require an Appraisal?
Understand conventional loan appraisal requirements, exceptions, and the process to secure your mortgage.
A conventional loan, a widely used mortgage option, is not insured or guaranteed by a government entity like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Private lenders, including banks, credit unions, and online originators, offer these loans. A property appraisal is a professional assessment of a home’s market value, used by lenders to evaluate the property’s worth and ensure the loan amount is appropriate for the asset securing the debt.
When an Appraisal is Required
For most conventional loan applications, an appraisal is a standard requirement. Lenders mandate this process to confirm the property’s value adequately supports the requested loan amount, protecting their investment. An appraisal also helps lenders comply with regulations requiring an objective, third-party valuation.
The appraisal provides an unbiased assessment of the property’s market value, distinct from the agreed-upon purchase price. A licensed appraiser performs this independent valuation. The lender typically orders the appraisal after the purchase agreement is signed and the loan application is submitted, ensuring the valuation is current and relevant.
Situations Where an Appraisal May Not Be Required
While generally required, a conventional loan might proceed without a full appraisal in specific scenarios. Appraisal waivers can be offered, particularly for certain refinance transactions like rate-and-term or limited cash-out refinances. Automated underwriting systems, used by entities such as Fannie Mae and Freddie Mac, often determine these waivers by employing automated valuation models (AVMs) to assess eligibility based on various data points.
Eligibility for an appraisal waiver often depends on factors indicating lower risk, such as a strong credit profile, substantial down payment, or significant existing equity. A lower loan-to-value (LTV) ratio generally increases the likelihood of receiving a waiver. Fannie Mae and Freddie Mac have expanded waiver eligibility, with some programs allowing LTVs up to 90% for primary and second homes starting in early 2025. Waivers are less common in rural areas or locations with limited comparable sales data. Even if a waiver is initially offered, an appraisal may still be required if there has been significant property damage, major repairs are necessary, or local laws dictate it.
Understanding the Appraisal Process
When an appraisal is required, the mortgage lender initiates the process, often coordinating through an Appraisal Management Company (AMC). A licensed appraiser is then assigned to conduct the valuation, acting as an independent third party to provide an unbiased opinion of the property’s market value.
During the appraisal visit, the appraiser thoroughly examines the property’s interior and exterior, assessing its condition, structural integrity, features, size, layout, and functionality. They also consider the property’s location, proximity to amenities, and alignment with the surrounding neighborhood. A significant part of their work involves analyzing recent sales of comparable properties, typically those sold within the last six months in the immediate area. The appraiser then compiles their findings into a detailed report, submitted to the lender within 6 to 20 business days after the inspection.
Navigating Appraisal Outcomes
Once the appraisal report is delivered, its findings directly impact the loan process. The ideal scenario is when the appraisal meets or exceeds the agreed-upon sale price, allowing the loan to proceed as planned. In such cases, the lender is confident the property provides sufficient collateral, and the buyer can move forward with the transaction.
If the appraisal comes in lower than the sale price, it presents several considerations. The lender will base the loan amount on the lower of the appraised value or the contract price, meaning the buyer may need to cover the difference in cash. Alternatively, the buyer can attempt to renegotiate the sale price with the seller to match the appraised value. If the contract includes an appraisal contingency, the buyer might have the option to withdraw from the purchase without penalty. Buyers also have the option to challenge the appraisal if they believe there are inaccuracies, requesting a reconsideration of value from the lender.