Ask Our Broker With Peter G. Miller
By Peter G. Miller
CTW Features
Question: Is it true that mortgages are now available that do not require an appraisal? If that’s the case, what’s the benefit to borrowers?
Answer: Since Sept. 1, both Fannie Mae and Freddie Mac have offered to buy selected mortgages from local lenders that do not require appraisals. The new option does not apply to all mortgages, but if the initial program is successful, the idea of appraisal-free mortgages is likely to expand.
For a number of years, automated valuation models (AVMs) have been used in the mortgage process to check the accuracy of traditional appraisals. The volume of data in such systems is now enormous, increased with each new property appraisal. More data and more experience has allowed companies to refine such systems to the point where they can value many properties – but not all – with a high degree of accuracy.
For both borrower and lenders, the use of automated systems reduces costs because there’s no appraiser to hire and pay. While it speeds up the process, such “benefits” totally miss the point. If you’re a homebuyer, you want an appraisal by an actual human appraiser.
Here’s why:
First, yes – it will cost money.
An appraisal is an important protection for borrowers because it can prevent over-paying for a property. If a lender has 15,000 mortgages and a few are wrong here and there, it’s not a big deal. If you’re a buyer and the appraisal is wrong, you can’t spread the risk of paying too much over thousands of loans.
Second, I recently looked at a home that showed really well from the outside. From public information, I knew the square footage and the number of bathrooms and baths. There were great photos of the kitchen, bathrooms and interior of the property. However, go inside and the place was musty, there was water damage in some closets, the washer and dryer were removed, an exterior building is rotted, etc. Now, the picture is very different.
Third, as a buyer you have a psychological investment in the property. It might represent your hopes and dreams. To the appraiser, it’s another job. The appraiser can be detached and objective, plus the appraiser gets paid regardless of the valuation.
Fourth, an appraiser is a professional. Buyers are not. It makes a difference.
Also, why do you need a faster appraisal? Isn’t it going to take time to pack and plan a move? Doesn’t the seller need time to find a replacement property? Pack? Move?
Finally, imagine that an automated valuation is off by 5 percent. Doesn’t sound like much.
For a $500,000 home you could pay an extra $25,000. Is that OK?
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
