Is an Appraisal Required for a Conventional Loan?

Property valuation is a fundamental component of the home financing process. Lenders must accurately assess the worth of the asset securing a loan to manage their financial exposure. This assessment, typically conducted through a formal appraisal, establishes a property’s market value, directly influencing mortgage terms.

Understanding Conventional Loans and Appraisals

A conventional loan represents a mortgage product that is not insured or guaranteed by any U.S. government agency. These loans are instead originated and backed by private lenders, such as banks, credit unions, and other financial institutions. Unlike government-backed loans like FHA, VA, or USDA loans, conventional loans often require a higher credit score and may necessitate a more substantial down payment, though they frequently offer greater flexibility in loan amounts and terms.

A real estate appraisal is a professional, unbiased opinion of a property’s market value at a specific point in time. A licensed or certified appraiser conducts this valuation, adhering to established standards. For lenders, the primary purpose of an appraisal is to determine the property’s collateral value, ensuring the loan amount aligns with the asset’s worth. The appraisal report provides a detailed analysis of the property, its characteristics, and market conditions.

The Standard Appraisal Requirement

For most conventional loans, an appraisal is a standard and mandatory requirement. Lenders rely on this independent valuation to assess the risk associated with extending credit. It ensures that the amount borrowed does not exceed the property’s actual market value, protecting the lender’s investment should the borrower default.

The appraisal directly impacts the loan-to-value (LTV) ratio, a metric for lenders. This ratio compares the loan amount to the property’s appraised value, determining the percentage of the property’s value that the lender is financing. A lower LTV ratio generally indicates less risk for the lender and can lead to more favorable loan terms for the borrower, potentially including lower interest rates or reduced private mortgage insurance (PMI) requirements. If the appraised value comes in lower than the agreed-upon purchase price, the lender will base the maximum loan amount on the lower appraised value, which could require the buyer to bring additional cash to closing or renegotiate the sale.

Conditions for Appraisal Waivers

While appraisals are generally required for conventional loans, limited circumstances may allow for a waiver of the full appraisal requirement. These appraisal waivers, often referred to as Property Inspection Waivers (PIW) by Fannie Mae or Automated Collateral Evaluation (ACE) by Freddie Mac, are offered when sufficient data is available to confidently assess the property’s value without an in-person inspection. Such waivers can expedite the loan process and save borrowers the typical appraisal fee, which can range from $300 to $500 or more.

Eligibility for an appraisal waiver is not automatic and depends on strict criteria, primarily designed for low-risk loans. Common factors include a low loan-to-value (LTV) ratio, often indicating a substantial down payment or significant existing equity, typically 20% down or higher. Waivers are also more common for refinances, especially if the property has been recently appraised and the data is available in the government-sponsored enterprises’ (GSEs) databases. These waivers are generally limited to one-unit properties, including condominiums, for primary residences and second homes, with a maximum property value of $1 million. Recent expansions in 2025 have increased LTV thresholds for waivers on certain purchase loans, allowing for lower down payments like 10% or even 3% in specific programs.

The Appraisal Process and Its Influence

When an appraisal is required, the process typically begins with the lender ordering the service from a licensed appraiser. The appraiser then schedules a visit to the property to conduct a thorough inspection. During this visit, the appraiser assesses various physical characteristics, including the home’s condition, size, features, and any notable improvements or deficiencies.

Following the on-site inspection, the appraiser conducts extensive research, primarily focusing on comparable sales (comps) in the local market. This involves analyzing recent sales of similar properties in the same neighborhood, adjusting for differences in features, age, and condition. The appraiser also considers broader market trends and public records to formulate a comprehensive report, often the Uniform Residential Appraisal Report, which details the methodology and supports the final valuation. This final appraised value directly influences the loan approval, as lenders use it to calculate the LTV ratio and determine the maximum amount they are willing to lend. If the appraised value is less than the agreed-upon purchase price, the buyer may face an “appraisal gap,” requiring them to cover the difference in cash, renegotiate the purchase price with the seller, or potentially withdraw from the transaction if an appraisal contingency is in place.