The appraisal is typically the leverage the lender has when they decide whether or not to approve your mortgage application. For example, if you signed a purchase contract for $200,000, but the value of the home came back at only $180,000, the bank would be in the hole right from the start if they did not consult with the appraiser. This is why most of the time, the FHA mortgage program requires an appraiser to review the property; however, there are exceptions.
The Standard Rules
Generally, there are no exceptions when it comes to the appraisal and obtaining new financing. This goes for the FHA program as well as any other government-backed program, such as VA, USDA, and Fannie Mae loans. As stated above, the report the appraiser creates is how the bank decides if the loan is worth the risk. It is also how the bank determines that the home you wish to purchase is safe and sanitary as they do not want to write a loan for a bad property either.
The Exception to the Appraisal Rule
There is one exception to the appraisal rule for FHA mortgages. If you refinance an existing FHA loan into another FHA loan using the streamlined process, you may not need to have the appraiser come out to your home again. According to the FHA, the same written report can be used for qualification purposes. This means that even if the value of your home dropped, you can still get a new loan and the FHA will back it up.
This is the FHA’s rules, though. Each lender has their own requirements on top of the FHA’s rules. Since the lender is the one funding the loan, they have the last say in what they want to accept and not accept. In some cases, where the lender is aware of serious value decreases in a particular area, they might require a new appraisal even on the FHA Streamline Refinance.
The Streamline Refinance is the only occurrence where the FHA would allow an appraisal exception. If you are not going the streamlined route because you need to take cash out of the equity of your home, then the bank will need to know the value of your home. This is so that they know they are not writing a bad loan where you are going to be in over your head and will never have equity in the home. Anytime cash is taken out of the value of the home, a new value report will be necessary.
The Benefits of the Appraisal
Even though the appraisal costs you money and adds a little time to the processing of your loan, there are many benefits to this report. If you are the seller, you can feel confident in the price you ask for the home. You do not want to ask for a price that is either too high or too low. If the price is too high, your home will not sell. If your price is much lower than the market value, you are throwing money away.
The same is true for the buyer. You want to know the value of the home you plan to purchase. What if you are offering a much higher price than the home is worth? You will never have equity in the home. The appraiser helps you ensure that the investment you make is a good one.
The FHA Streamline Refinance is a great loan because it enables you to lower your interest rate and save money every month. This is the only time it should be even considered to waive the appraisal. At this point, you already own the home and want to get ahead. Even if the value dropped, refinancing into a lower rate can help you get ahead by making extra payments or just by paying less interest and more principal with the lower rate.
The next time you take out an FHA loan, do not think of the appraisal as a bad thing. Yes, it costs you money, but that money will help you protect your investment by helping you make the right decision.