Home appraisal causes one of the biggest delays in the closing process. Why? Appraising a home can take days and is often the last piece of the puzzle before final loan approval is granted. But there’s really no way to get around it. Or is there?
What is an Automated Appraisal?
A little more than 25 years ago, lenders took the first steps toward automated appraisals by keeping track of the purchase price and appraised value of each home for which they made loans and then adding that information to a common database. Eventually there was enough information in the system to pretty accurately estimate the value of a home. Automated appraisals work like this:
- To determine an estimated current value, the appraised value from the most recent transaction of a property in the database is adjusted up (or down) to account for changes in market value. That estimate is then compared to the average price per square foot of homes of similar size, age and quality in the area, and a “per square foot” value is assigned to the property.
- If the estimate and price per square foot are close, then the computer decides that it can estimate the value with a high degree of confidence.
Initially there were weaknesses in the system. Without an inspection, there was no way to account for remodeling work or deferred maintenance. Custom homes, highly mixed neighborhoods and homes that had never made it into the database could not be valued reliably. But even as early as 1993, the system was remarkably reliable at estimating the value of tract homes that had previously been sold or refinanced and were located in neighborhoods where lots of homes were selling.
Skipping the appraisal will save you about $500 in fees, and in most cases, will shave a few days off of the home loan process.
Over time, the database has grown and the software refined. Since the financial crisis, lenders have used automated appraisals as a back-up validation for traditional appraisals on almost every loan.
Why the Shift from Human to Computer Appraisals?
In short, humans are, well, human, and can be influenced by their own personal prejudices as well as outside forces. Prior to the financial crisis, the appraisers were chosen by loan officers, who often assigned the appraisal to the person who offered to appraise the property for the highest possible value. This made more deals possible, but arguably was not good for consumers. Since the crisis, appraisals have been ordered through independent agencies called Appraisal Management Companies (AMCs) to ensure appraiser independence. Now, however, appraisers are often influenced by underwriters and AMCs to keep appraised values to minimize risk. In short, humans are subject to coercion, but computers can’t be swayed — data is data. In 2016, Freddie Mac and Fannie Mae announced that they would begin purchasing loans without appraisals, under certain conditions. A lender still had to run an automated appraisal and the system had to determine that it had a high degree of confidence in the estimated value. The loan-to-value ratio had to be low, the borrower had to have great credit and the type of transaction was restricted to refinances with no cash out.
If you want an appraisal, you can still ask for one, but you don’t have to have one if you get a PIW offer.
Now that is changing, and both Fannie and Freddie are allowing Property Inspection Waivers (PIWs) on certain purchase transactions (but still subject to the other restrictions). If you want an appraisal, you can still ask for one, but you don’t have to have one if you get a PIW offer. Skipping the appraisal will save you about $500 in fees, and in most cases, will shave a few days off of the home loan process. Freddie began accepting PIWs as of September 1, 2017, and Fannie began on August 22. For those who need to close fast, this is good news. Be aware, however, that PIW offers are few and far between right now. Over time and as the database grows, software improves and investors gain confidence in the new rules, they will become more common. Fannie and Freddie will almost certainly loosen the guidelines for their use as time goes on.
Deciding What’s Right For You
Asking for an appraisal will add hundreds of dollars to the cost of your purchase and at least a few days to the closing process in most cases. On the other hand, you might think of it as cheap insurance, considering how much you are spending on your new home. There’s no right or wrong answer. But at least now you may have a choice.