Recently Fannie Mae and Freddie Mac have begun offering PIW’s (Property Inspection Waivers) to certain borrowers under certain conditions. This enables the lender to provide a home loan without having an appraisal completed for the loan. Why? It really comes down to risk. Borrowers who meet certain criteria have a low risk of defaulting on their loan. For the lender, it’s all about risk. That makes sense since they are in business to make money. The lender knows that even if the amount being lent on is higher than the market value of the home being purchased, or borrowed against, the borrower is less likely to default if they meet certain criteria. Therefore, less importance is placed on the collateral, namely, the market value of the home.
Does that mean that it is a bad idea to have an appraisal completed even though not required? Generally, borrowers would not want to take out a home loan for more than the market value of the home. For the borrower, it’s not about risk as much as about not wasting money by purchasing a home for more than it’s market value. If a borrower does over-pay for a property, as long as they are making the payment, the lender probably does not care. However, to the borrower, it could be a costly mistake that could take years to get out of. Especially if there is another market correction in the future. If history is any indicator, that is likely at some point.
Who would take a loan out on an automobile without first finding out what the market value is? The answer is obvious. So, who would want to take out a home loan in which interest is going to be paid over a fifteen or thirty year term, and not want to have a good understanding of its market value?
There are a number of benefits to the borrower still obtaining a private appraisal. First of all, it will help to establish that the market value of the home that the loan is being made on is not less than the amount of the loan. That just makes good sense! If the home owner orders the appraisal, while the lender cannot use it, the borrower can certainly use it to decide how much they are willing to safely borrow. In this case, the borrower is the appraiser’s client and not the lender. Therefore, the appraiser can talk to the home owner in detail about the appraisal process and why things were completed a certain way as well as any other questions or concerns they may have.
Additionally, instead of the hefty fee that the AMC’s (Appraisal Management Company) add onto the appraisal fee, the borrower is just paying for the appraisal directly from the appraiser which will typically be considerably less than if the appraisal was ordered through an AMC! If a borrower cares enough to hire an appraiser to perform a professional appraisal of a property that they are using as collateral, it stands to reason that they would not want to coerce the appraiser. They would certainly want a supportable value estimate that reflects the market accurately.
So if you qualify for an appraisal waiver (PIW), feel good in knowing that you are viewed as a low risk borrower. As such, you have no doubt proven that you make wise decisions. Hire a state licensed or certified appraiser to help you make another wise decision when it comes to your next home loan.
Here are some other articles and videos I enjoyed this week!
Like Housing, Raccoons Can Reach Their Peak in Full View of Spectators – Housing Notes by Jonathan Miller
Peak prices & “bubble” conversations – Sacramento Appraisal Blog
Appraisers ANSI Measuring Standards – The Appraiser Coach
Hey, if the market is so hot why didn’t my home appraise? – Birmingham Appraisal Blog
Thanks Jamie. I always appreciate your posts. It is alluring to save money by not having an appraisal, but it can also be dangerous. I know big data has come a long way, so automated valuations can be very useful, but sometimes computers are nowhere close to correct about value.
Thanks Ryan! So true. It is amazing how accurate some AVM’s are getting. To your point, they can be way off too. It can be a real gamble. Especially if there are not many truly comparable sales that have sold in an area recently. There’s also the risk of the gross living area recorded in public records being off which can have a big impact on value. Buyer beware.
Jamie, this is an important topic and insightful article. Hopefully people remember the 2008 financial crisis and take heed. Like Ryan said it can be dangerous. With such a large price tag its not worth the risk.
Thank you so much Gynell! Yes indeed! These appraisal waivers hurt the public in two ways. Not only can a person easily over pay for a home, but that sale the becomes a comparable sale that we appraisers may use to establish a value for another home, which can create artificially inflated values and quite possibly a bubble. It’s always better to have the appraisal completed. We are in dangerous waters!