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Do You Need an Appraisal for Your Refinance?

An appraisal provides your mortgage lender with an unbiased opinion of your home’s value. Its purpose is to verify that the collateral (your home) is sufficient enough to justify the loan amount.

Appraisal fees typically range from $300 to $400, but they can cost more. Although your lender will order the home appraisal, the cost is passed down to you at closing.

But you don’t always need an appraisal when refinancing your mortgage. Below, we’ll discuss what you need to know about bypassing a home appraisal. Additionally, if you’re required to have an appraisal, we’ll give you tips to help you prepare your home for an appraiser’s visit.

When can you skip a refinance appraisal?

Both borrowers of conventional and government-backed — Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and Department of Veterans Affairs (VA) — mortgages can skip appraisals on certain refinance transactions.

One of the main factors in determining whether a refinance appraisal is needed is your loan-to-value (LTV) ratio, which is calculated by dividing your outstanding loan balance by your home’s value. Another factor is the type of mortgage for which you’re applying.

Conventional loans

Conventional mortgages, which conform to Fannie Mae and Freddie Mac guidelines, have relatively stricter eligibility requirements than some loans backed by the federal government. For example, some lenders may have a 640 score cutoff, even though the minimum credit score allowed is 620. You may also need a 5% down payment, though it’s possible to qualify with 3% down if you meet certain income requirements.

Fannie Mae and Freddie Mac allow appraisal waivers for certain refinance transactions on one-unit, primary residences. The waiver allows a conventional refinance to be underwritten without a home appraisal. Instead, lenders rely on existing data about the property to determine its value.

  • Fannie Mae: An appraisal waiver will be considered for limited cash-out refinances for borrowers who have a 90% LTV ratio or lower, and cash-out refinances for borrowers who have a 70% LTV or lower.
  • Freddie Mac: No-cash-out refinances may be eligible for an appraisal waiver, provided the borrower has a maximum 80% LTV ratio. Cash-out refinances aren’t eligible.

FHA loans

Loans insured by the FHA have more lenient eligibility guidelines, such as a minimum 580 credit score and 3.5% down payment requirement.

FHA borrowers who refinance their mortgage through the streamline refinance program, which has reduced documentation and underwriting requirements, aren’t required to have a home appraisal.

The purpose of an FHA streamline refinance is to lower the principal and interest portion of the monthly mortgage payment on an FHA loan.

USDA loans

The USDA insures mortgages for eligible low to moderate income homebuyers in designated rural areas. Many lenders prefer a minimum 640 credit score, and there’s typically no down payment required.

USDA loan borrowers who wish to refinance their loan through the streamlined assist refinance program don’t need a new appraisal unless they’ve previously received a subsidy. There’s no credit review required for this type of refinance, but your lender must confirm that your mortgage was paid on time the past 12 months. Your monthly mortgage payment must also drop by at least $50 with a USDA refinance.

VA loans

The VA insures mortgages that benefit eligible military members, veterans and their families. There’s no down payment required on VA loans, but many lenders require a 620 credit score.

The VA offers an Interest Rate Reduction Refinance Loan (IRRRL), which is also known as a VA streamline refinance. There’s no required credit underwriting and no need for an appraisal.

Pros and cons of skipping an appraisal

Whether you qualify for a mortgage refinance program that doesn’t require an appraisal or are eligible for an appraisal waiver, there are benefits and drawbacks to opting out.

Pros

  • You save several hundred dollars in appraisal fees.
  • Your lender won’t have a value-related reason to back out of the deal.
  • Your refinancing timeline could be shortened since you’re no longer waiting for an appraiser to visit your home.

Cons

  • You don’t have a confirmation of your home’s current value outside of existing data.
  • You could overpay for your new mortgage.
  • You may still have to pay for mortgage insurance if the existing data doesn’t show you have enough equity to drop it.

What appraisers look for before a refinance

Home appraisers essentially review much of the same information for a refinance appraisal that they do for a purchase appraisal. The most common appraisal method used in residential real estate transactions is the sales comparison method, which involves comparing the home’s amenities, condition, construction and other features to those of similar, recently sold homes in the neighborhood.

Appraisers also pay attention to the following details:

  • Location of the home
  • Nearby amenities
  • Nearby busy streets
  • Sales price of nearby homes
  • State of the local economy
  • Proximity to airports
  • Quality of public schools
  • Quality of public water

Read our guide on everything you need to know about home appraisals for a thorough rundown.

Differences between a purchase and refinance appraisal

Although purchase and refinance appraisals have a similar process to determine a home’s value, there is something that differentiates the two, according to Michael Becker, a branch manager at Sierra Pacific Mortgage in Lutherville, Md. The difference? The sales contract.

Becker said when home appraisers are calculating a home’s value for a home purchase, they have access to the contract and know the sales price going in. That’s not the case for a refinance.

“They don’t know what number I need for the deal to work,” Becker said.

What can go wrong during a refinance appraisal?

A few things can happen during an appraisal that could derail the refinance process. One common issue is an appraisal coming in lower than expected. You may be able to appeal the appraisal and even get a second appraisal. Still, if no changes in value come from taking these actions, you may have to pay more money to make up the difference in value, or wait to refinance until your home value increases.

Another issue is an appraisal report showing that a home’s value is “subject to certain repairs,” Becker said. This slows down the refinancing process, as those repairs would need to be completed before things can move forward.

Becker was working with a client on a refinance, and it was revealed during the appraisal that the client was in the middle of several home improvement projects. The transaction was put on pause and actually cost the client more money.

“He’s gotta finish those repairs, and then I gotta get an appraiser back out there, at an additional cost, to reinspect the property,” Becker said.

Aside from the reinspection fee, which costs about $150, the client had a rate lock in place that costs money to extend — should the closing date get pushed past the rate-lock deadline. A rate-lock extension could cost up to a half-percent of the loan amount.

How to prepare your home for an appraisal

Keep these tips in mind as you get ready for a refinance appraisal:

  • Be present for the appraisal. The home appraiser may have questions about your home’s condition or construction. Since you’re the homeowner, you should be the one to answer them. You could also help your case by pointing out your home’s unique features.
  • Make sure your home is presentable. Remove any clutter from your rooms, clean up where needed and do some landscaping in your front and backyards if necessary.
  • Wrap up those smaller projects. If you haven’t finished installing that new bathroom tile, replacing damaged drywall or repainting your home’s exterior, do so before you apply for a refinance.

The bottom line

While you may qualify to skip a home appraisal on a refinance, it might still be in your best interest to go forward with an appraisal. This may involve declining an appraisal waiver on a conventional loan or choosing a non-streamline refinance program if you have an FHA, USDA or VA loan.

An appraisal puts a value on your home, which helps you more accurately understand how much equity you’ve built so far. In the case of a conventional loan, an appraisal can also save you money by allowing you to drop private mortgage insurance — as long as you’ve built at least 20% equity in your home.

Whatever you decide, be sure you fully understand what’s needed to replace your existing mortgage with a brand-new one. Review these top 10 refinancing tips.

 

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