If you buy a home, there may come a time when you want to refinance. And refinancing without an appraisal can save you time and money.
Bypassing the appraisal can save you hundreds of dollars. Not to mention, with one step removed from the process, it will allow your application to be processed faster, and that’s not including any delays caused by the appraisal.
An appraisal is an objective, professional estimate of a home’s market value. It is determined by a trained appraiser who evaluates the home and establishes the home’s value based on a number of factors, including location, condition, comparable homes, the current market, etc… An appraisal is required by mortgage lenders, and it determines how much the lender is willing to loan a buyer. There’s a difference between a home’s value and what you are willing to pay for it. The lender will not give you a mortgage beyond the value of the home, because they need to ensure they will get their money back in case you default on your loan. So it’s in both parties’ best interests not to loan you more than the home is worth.
But buying a new home from a seller is different from refinancing the mortgage on your own home. You cannot get a mortgage to buy a home without an appraisal. And while lenders generally do require appraisals for refinances too, there are times when you can refinance your home without one. This is called a no-appraisal refinance. So when is an appraisal not required for a refinance? Let’s explore how you can refinance your mortgage without an appraisal.
Fannie Mae and Freddie Mac, along with your lender, can choose to waive appraisals for homeowners who are refinancing with conventional loans. Waivers are somewhat rare, and you will most likely need an appraisal to refinance your home. But waivers may be granted for borrowers who are good applicants with a solid credit score, income, and equity in the home. Appraisal waivers can be given for eligible cases, such as for loans for single-unit properties; loans for investment properties with a 75% or lower LTV ratio; loans for primary/secondary residences with a 90% or under LTV ratio; cash-out refinances for primary residences with an LTV ratio of 70% or under; cash-out refinances for investment properties and second homes with an LTV ratio of 60% or lower. The LTV ratio (loan to value ratio) tells you how much of your home’s value you are borrowing.
But there are loans that are ineligible for waivers. They include loans for multi-unit properties and co-ops; loans for homes that are worth over $1 million or have resale restrictions; HomeStyle loans; construction loans; Texas 50(a)(6) loans; loans that depend on the home’s rental income; and more.
FHA, VA, and USDA Streamline Refinances
Since they are backed by the federal government, these loans offer Streamline Refinances, which do not require appraisals in an attempt to lower mortgage rates by lowering upfront closing costs. This is generally the case as long as your new loan is the same kind of loan as your original loan (i.e. going from a VA loan to a VA Streamline Refinance). Lowering mortgage rates makes the loan less of a risk to lenders because it lowers the chance you will default on the loan. So it’s usually a win-win for both the borrower and the lender.
FHA Streamline Refinance. This loan is backed by the Federal Housing Administration. Among the requirements, your current loan must also be an FHA loan, there must be 6 months since you received the loan, and you cannot be late with your loan payments. Your income and credit do not have to be reviewed in order to qualify, but you must get a “tangible net benefit” from refinancing, meaning you must gain some advantage from refinancing, such as debt consolidation or even just lowering your rate. No appraisal is required, and there is no minimum equity requirement. You cannot do a cash-out refinance.
VA Streamline Refinance. This loan is backed by the Department of Veterans Affairs and is meant for veterans, active military members, and their surviving spouses. Sometimes called a VA IRRRL (Interest Rate Reduction Refinance Loan) Mortgage, this loan allows you to refinance as much as 120% of your loan’s value. To qualify, you must have a current VA loan, live in the home, and have six on-time mortgage payments in a row. Similar to an FHA Streamline Refinance’s “tangible net benefit”, you must have a reason to refinance, such as lowering your monthly payment. No appraisal is required, and you do not need to show proof of income. You cannot do a cash-out refinance.
USDA Streamline Refinance. This loan is backed by the U.S. Department of Agriculture and is meant for lower-income borrowers in rural areas. You must have a current USDA loan, a $50 (or more) savings per month from refinancing, an income under 115% of your area’s median income, and on-time mortgage payments for the last 6 months. In addition, the home must be your primary residence and you must meet the debt-to-income requirements. Unlike the other Streamline Refinances, USDA Streamline Refinances only have 30-year, fixed-rate loans. No appraisal is required. You cannot do a cash-out refinance.
Automated Valuation Model (AVM)
This option appraises your home’s value by using an algorithm instead of an actual appraiser. With an AVM, a home’s value is determined by certain data points, such as the prices of comparable homes in the area, existing valuations of your home, and the most recent price of the home. You may not realize it, but you’re probably already familiar with an AVM if you’ve ever looked at estimated property values on Redfin, Zillow, etc…
But this option is far from perfect, as a computer can’t take into account certain things that a human appraiser would, such as the condition of the house, renovations, etc… Regardless, this may be a good option if you have already lived in the home for a while and have a lot of equity. But if not, the lender may require an actual appraisal.
The Bottom Line
If you are refinancing your home and are concerned about the appraisal or want to save time/money, reach out to your lender to see the options they offer for refinancing without an appraisal. One thing to remember is that even though appraisals aren’t required for the loans mentioned above, it’s possible your lender still will. So be sure to shop around and talk to your loan officer to make sure you have all the information you need to determine the right path for you.