Appraisal waivers — Are they good or bad?

A home appraisal is a critical step in the homebuying process, ensuring that you don't pay more for a property than it's worth. An appraisal contingency — which allows you to walk away from the deal if the home doesn’t appraise for the right amount — is often a critical part of financing a mortgage through a traditional lender. Unfortunately, an appraisal can slow down a sale, especially if the appraiser values the home far below what buyers agreed to pay. 

Some buyers may consider requesting an appraisal waiver and forego an in-person inspection —but is it a smart move? While this approach can expedite the sale and closing process, it's important to weigh the potential risks. By waiving the appraisal, you might overpay for your home or end up buying a house with undisclosed issues. 

What is an appraisal waiver? 

During a typical home sale, the appraisal process starts after the buyer and seller agree upon a sales price and sign a purchase agreement. The lender for the buyer typically sends a third-party appraiser to inspect the property, to ensure the agreed-upon price matches the actual value for the home. But sometimes, buyers wish to forgo the appraisal process in an attempt to save time and money.

While many buyers may be eager to take advantage of this waiver, it's important to understand that not all buyers and homes qualify for it. For example, homes that are unique, in need of significant repairs, or located in less established neighborhoods may still require a traditional appraisal. Lenders also have the discretion to deny a waiver if they deem in-person appraisal necessary. 

Overall, while an appraisal waiver can be a beneficial option for some, it's important for buyers to understand the criteria and limitations to make an informed decision.

Who can use an appraisal waiver?

Whether or not someone waives an appraisal depends on a combination of factors such as the specifics of the property, its location, and market conditions. Lenders may opt to waive the appraisal requirement if a property's value can be confidently determined through the use of AVMs or if the estimated value falls within a predetermined range.

How do appraisal waivers work?

Automated software has revolutionized the way appraisal values are determined for properties. When buyers request an appraisal waiver, lenders rely on automated valuation models (AVMs) to determine the value of the home being sold. They use information from nearby home sales (comps) and past sales data to determine a fair price for the property. The software also uses specific information about the property — including size, age, and condition — to come to a value for a home. 

That said, many of these criteria can’t be understood by hard data alone. It's important to acknowledge the limitations of even the latest and greatest appraisal software. One major drawback is that they simply can’t assess the true condition of the property "on the ground." This means that any factors not accounted for in the data — such as structural or foundation issues or unique features — may be overlooked. In short, an automated appraisal may not accurately reflect the true value of a property.

Appraisal waiver requirements

As mentioned, not all homebuyers and not all properties qualify for appraisal waivers. If you’re intending to buy a property while waiving your appraisal, you’ll need to work with a lender that relies on the automated underwriting systems offered by Fannie Mae and Freddie Mac. Thankfully, most lenders use them.

You’ll also need to discuss eligibility requirements with your lender. Generally, buyers need a great credit score to qualify. 

The property you’re buying must also meet requirements. For example, it needs to be a single-unit property, like a single-family home or condominium—multi-family properties don’t qualify.

In addition to meeting the lender’s qualifications, you need to come up with a down payment. This is typically 20% of the home’s final purchase price, but there are some exceptions. If you’re buying a home in an area the Federal Housing Finance Agency specifies as a “high-needs rural area,” you can qualify for an appraisal waiver with a very low down payment. In some cases, buyers can even secure an appraisal waiver by fronting just 3% of the home’s overall purchase price.

How common are appraisal waivers?

In today’s competitive real estate market, appraisal waivers are becoming more common. The pandemic and the housing boom that accompanied it have made markets across the country more cut-throat than ever. There’s simply a huge demand for housing and not enough supply to cover it — a seller’s market. 

Buyers who want to be first in line for the property of their dreams — or at least for the best property they can afford — are choosing to waive appraisals to speed up the buying process. It’s a way to show sellers that they’re serious about paying top-dollar for a property — even if that means potentially paying more than it’s worth. 

→ Home value estimator: How much is your home worth? 

The advantages of appraisal waivers

While appraisal waivers can be risky, they provide several distinct benefits for buyers (and sellers, too):

Saves time and money

Traditional appraisals can take a week to complete and cost several hundred dollars. An appraisal waiver eliminates these costs, you can speed up your homebuying timeline overall. 

Makes the loan process more efficient

A traditional appraisal is often a hurdle in terms of the mortgage process. As mentioned above, they can take days or even weeks to complete. Waiving appraisals mean both buyer and seller can move forward with the transaction and the buyer can get approved for a mortgage more quickly. 

If you’re planning to buy in a red-hot market, an appraisal waiver can give you a better chance of securing the property you want, rather than letting another eager buyer slip in while you wait.

Eliminates the need for a home inspection

In certain situations, an appraisal waiver can also make it so that you can skip out on getting a home inspection, too. A home inspection is where a trained professional evaluates a home in order to determine its current condition, and if there are any safety or damage-related issues. 

However, an appraisal waiver can mean that the inspection is waived in certain situations. This is usually only the case if the property is relatively new and considered to be in good condition.

Disadvantages of appraisal waivers

If you’ve found the perfect home, you might be tempted to get an appraisal waiver to expedite the process and secure the sale as quickly as possible. Remember, though, that appraisal waivers come with several risks, including:

Incorrect assessed value

Without an appraisal, buyers rely solely on their own judgment or the seller's asking price concerning how much the home is worth, which may not accurately reflect the property’s true market value. 

Let’s say you get get an appraisal and it comes in low. That means the appraiser doesn’t think it’s worth the listing price that you plan to pay for it, and your mortgage lender won’t extend you a loan. If you waive your appraisal, you won’t know this key information and could end up overpaying for your new house. 

Paying too much could lead to mortgage payments that are too high, or a depreciated home value that can cause issues when you want to sell later on. An appraisal waiver takes away that critical safeguard of an appraisal — which makes sure you’re the sales price of the home makes sense — and puts all the risk on your shoulders. 

→ Learn about what happens when the appraisal doesn’t match the sale price

Uncertain property condition

During an appraisal, a professional performs an inspection to check the house’s condition, highlighting any defects and providing an array of useful tips on maintenance and expensive repairs. While they aren’t an inspector per se, a professional appraiser can still give you a broad sense of any potential safety issues and an idea of how much to budget for future repairs.

If you waive the appraisal, an inspection isn’t compulsory and is usually just an optional add-on. This could cause problems later on when you discover defects and maintenance problems you were unaware of.

Protection for lenders, at your expense

Appraisal waivers often benefit the lender more than the buyer. A waived appraisal could be a way for the lender to secure their investment, regardless of the property's condition or value. Once you sign the papers, your lender may sell your loan to another bank. If the bank receives a property claim for a lost asset, your lender is protected against the loss. That means you’re unprotected, and you could end up in incalculable financial distress in a worst-case situation.

Should you get an appraisal waiver?

Ultimately, the decision to get an appraisal waiver is up to you. There’s no denying that an appraisal waiver can streamline your home buying experience in the short term. For long-term reassurance and financial stability, an appraisal is always recommended. (You can also  Unfortunately, current market conditions in 2023 value speed-to-closing, putting homebuyers in a tough position. 

Avoid making a costly mistake and invest in an appraisal that supports your purchasing decision. The term “buyer beware” doesn’t have to apply to your purchasing situation—simply trust in the professionals and invest in an appraisal to protect your financial future.

FAQs

Here's are more details about how appraisal waivers work.

What does waiving appraisal contingency mean?

Waiving the appraisal contingency in a real estate transaction means that the buyer agrees to proceed with the purchase without requiring an appraisal to determine the property's value. By waiving this contingency, the buyer accepts the risk of potentially overpaying or encountering undisclosed property issues.

What are the risks of waiving an appraisal contingency?

Waiving an appraisal can be a risky decision because you, as the homebuy, essentially forgo the opportunity to receive an unbiased assessment of the property's value. 

Why would someone waive an appraisal?

One common reason is in a competitive housing market when buyers may want to strengthen their offer to stand out among multiple bids. By waiving the appraisal, buyers signal to sellers that they are willing to pay the asking price regardless of the appraised value. Additionally, cash buyers or those with substantial down payments may be more inclined to waive appraisal contingencies as they have more flexibility in assuming the risk.

Can you back out of an appraisal contingency?

Generally, backing out of an appraisal contingency depends on the terms of the contract. If the contract includes specific provisions allowing buyers to back out if the appraisal falls below a certain threshold, then they can typically terminate the contract or renegotiate with the seller based on the appraisal results. However, once the contingency is waived, backing out solely due to the appraisal becomes more difficult, and the buyer may risk losing their earnest money or facing legal consequences.

Is waiving an appraisal a good idea?

Whether waiving an appraisal is a good idea depends on several factors. Waiving the appraisal can make your offer more attractive in competitive markets, increasing the chances of winning a bidding war — but, it also involves risks like overpaying for the property or being unaware of potential issues with the construction. It is essential to carefully evaluate your financial situation, conduct thorough research, and consult with professionals, like real estate agents or appraisers, to make an informed decision based on your specific circumstances.