Both Fannie Mae and Freddie Mac announced recently expanded appraisal waivers to reduce costs and help many first-time homebuyers.
The pair already offer appraisal waivers on some of the loans they underwrite, but the loan-to-value (LTV) ratio currently stands at 80%.
This means you should come in with a 20% down payment to avoid the cost and potential hassle of a regular appraisal.
To improve this process and ease the burden on low-income borrowers, this number will increase to 90% LTV from the first quarter of 2025.
And it will be extended up to program limits (eg 97% LTV) with their strict waivers based on appraisals.
You May Not Need an Inspection on Your Next Home Purchase
While test waivers aren’t all that new; introduced by Fannie Mae in 2016 for refinancing and later expanded to home purchases in 2017, they are limited in scope.
In other words, many home buyers still need to pay for an appraisal when they apply for a loan.
This results in additional costs, which can range from $400 to $1,000 or more. Along with the lengthy mortgage process as the appraisal is ordered, conducted, and submitted.
It can also lead to uncertainty about the value of the collateral, which could jeopardize the loan late in the game if a human appraiser comes back with less than the purchase price.
For these reasons, getting a waiver of appraisal can be a blessing. What don’t you like? Fast loan approval, low stress and reduced borrowing costs.
But as mentioned, these only apply to loans where borrowers have been able to get in with a 20% down payment.
This did little to help those who needed it most, ie first-time home buyers and/or low-income borrowers who couldn’t afford to put 3-5% down.
However, from the first quarter of 2025, this savings waiver will be extended from 80% of the maximum LTV to 90% of the LTV/TLTV.
So if you’re coming up with 10% down on your home purchase, you may even be able to quickly skip the appraisal.
And the maximum LTV ratio for purchase loans that qualify for the appraisal-based waiver will jump from 80% to 97%.
This means borrowers will be able to get a 3% down Home Possible loan from Freddie Mac, or Fannie Mae HomeReady without an appraisal.
Understanding the Different Test Waiver Available Today
First, I should note that this appraisal waiver applies to conventional loans, not federal loans such as FHA loans or VA loans.
Therefore only conforming loans backed by Fannie Mae and Freddie Mac are eligible for appraisal waivers.
Second, there are two different types of probation waivers. Let’s talk about direct concessions that depend only on data and technology to accept the offered value of the lender.
- Fannie Mae is known as “Acceptance of Value”
- Freddie Mac is known as automated collateral evaluation (ACE).
This usually requires that prior testing performed on the subject area be obtained from the database.
They are also limited to single-unit properties (including condos) for primary residences and secondary residences.
In addition, there is a maximum value of $1 million (or sale price) for properties to receive a waiver.
There is good news there is no money borrowers with these options, which can save several hundred dollars or more.
There are also so-called appraisal based waivers, which will see their LTV limit increase from 80% to 97%.
These rigorous analytical methods require structural information to be collected physically on site by trained data collectors.
Similar to an appraisal, the lender first organizes the collection of property data, but the result should be reduced costs and faster turnaround times.
The cost of an appraisal-based appraisal may be half the cost of a traditional appraisal, so maybe $200 or more versus $400 or more.
Does This Introduce More Risk To The Housing Market?
While these changes will likely be welcomed with open arms by mortgage lenders (not so much by appraisers), there is a question of risk.
The property’s collateral value is a large part of the equation when underwriting and approving a loan.
If the home inspection is waived, one can argue that the loan is natural.
However, this is actually why Fannie Mae stopped using the phrase “examination waiver” and replaced it with Value Acceptance.
That change was made to better reflect the actual process, which relies on data collection and technology to accept the lender’s given amount.
This is not the same as a human analyst, who again uses data collection to come up with an appropriate value that supports the value entered.
But I think there will be some scrutiny, especially since the changes are being introduced at a time when housing affordability is rarely so bad.
Allowing a home buyer to give up an appraisal when they put just 3% down sounds a little scary when home prices are at/near all-time highs and have increased 50% in the past few years.
It also widens the gap between conventional loans and government-sponsored loans, the latter of which are known to be more difficult to get approved due to screening/testing requirements.
(photo: m kasahara)
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