Monday, April 20, 2020 / by Anne Rose
Q & A WITH ADAM SLACK AND TARA JONES OF GUARANTEED RATE
We’ve heard there are changes that home buyers should understand in the appraisal process right now. What are the most recent updates?
Adam: Processes for property appraisals have been changing daily, in light of the COVID-19 social distancing requirements and business restrictions.
Tara: It’s been interesting. Each change does seem like it is for the better. On your conventional loans, Frannie, Freddie, on primary residences, those are desktop versions for now. Which means that the appraiser doesn’t have to go out. They can just do an AVM (automated value) and that is not only beneficial for people who may be living in the home, but for the appraisers health safety as well. The appraiser doesn’t have to leave their home for this scope of work. That has been a really big win in the mortgage process.
On government loans, they are often a little bit more conservative, and FHA now is allowing for exterior only. VA is allowing for exterior only, with some photos and measurements. So definitely a move in the right in the direction to help speed up the closing process and not have any delays while people are adhering to the shelter-in-place order.
The first thing is that we want to get the information out there to buyers that restrictions and requirements have changed to make it easier to get an appraisal for your home loan right now. - Adam Slack
When did those lessening of restrictions come through? Are they all COVID-19 related?
Tara: This guidance was as of April 15th. I want to note that this is all only for primary residences. There are some loosened restrictions on second homes and investment properties, that might help right now, but those are most likely going to be traditional appraisals.
Adam: On the government side, we were not really sure they were going to loosen it up right now, although we were hoping they would. That’s huge that they have gone with allowing exterior only of FHA, VA, and USDA.
How much of a change is that in terms of time and getting things done now that closings are heavily digital?
Tara: We are seeing appraisals come back quicker because there is not the scheduling to deal with that has been so problematic with shelter-in-place and social distancing. We don’t have an appraiser trying to coordinate with a homeowner who is living in the property, and needing to work around health safety concerns. If it’s a desktop appraisal, the appraiser literally does not have to leave their home; they just need to balance appraisals with their own workload.
The exterior-only appraisal takes even less than time of a traditional appraisal, with driving around the home, taking exterior photos and we are still seeing those coming in pretty quickly, in a couple days, so we are not really seeing any delay on the vendor side.
Adam: Another thing that would be beneficial to note here is that when an appraiser goes into a home and sees something that needs to be fixed or repaired, that’s going to be something that is “subject to completion”. VA and FHA are very strict on that. Obviously, now, if there is something obvious on the exterior, like chipped paint or rotten wood, the appraiser will make note on their report, but that is still going to make a transaction being held up for repair issues a lot less likely because the appraiser is not actually going into the house. The buyer will still want a home inspection, but with respect to the loan process, the government can often be very stringent on those details, and right now potential delays in an already burdensome process aren’t needed. They could kill the deal. This now makes things a little smoother.
Is this a process that is equally as confidence-inspiring for both buyers and sellers as pre-COVID-19 appraisals? Would you recommend caution, or do you have full faith in these appraisals?
Tara: The thing to consider here is the appraiser when they go out to look at a home, they are looking at the condition and the upgrades and things like that, but they are really looking for value, and overall condition. That is what the inspection is for. Based on pictures and comparable sales, the appraisers are able to get the same information. For example, on comparable homes, they can’t go into those homes either, so they are already going off of pictures. MLS listings usually have everything an appraiser needs. For some of them, like a VA loan, they are doing a phone interview with the owner so that they can go down a checklist so they are clear on what upgrades have happened and when.
An appraisal is a question of value, though, not whether the home is in good shape.
An appraisal is a question of value, though, not whether the home is in good shape. A lot of these homes are already going to be Fannie or Freddie mortgages too, coming out of, unless it is an owner-financed or a property that is owned free and clear, which you don’t see that often. The likelihood that one of the agencies already own the note and has been through the appraisal process is high.
Adam: The appraisal is really based on bedrooms, bathrooms, location, square footage, and amenities. All of that is probably on record. The condition is generally conveyed in the MLS photos, and the likelihood that something going from the condition represented in the photos to being a completely different property is very minimal. There may be a little bit of risk there, but it’s very, very unlikely.
The information that an appraiser needs to come up for a value assessment is all public record.
Tara: That also brings up a good point. There is a property inspection waiver - when we run the loan with all of the information about the home through our automated underwriting system, through Fannie or Freddie, it will tell us in some cases that no appraisal is needed, period, not even a desktop. That is because the information that the agency has available makes them feel so confident that they know what that home is worth: what the selling price is. The buyer can always opt to do an appraisal anyway, but the criteria for property inspection waivers has loosened right now as well. What they are looking for are properties that are newer, or have a larger down payment, and again, more so primary residences.
Adam: Newer may often be the case for a property inspection waiver, but generally on brand new construction, they don’t happen. Generally when Fannie or Freddie has a record of the property - if someone bought the house three years ago, and has refinanced the loan, the chances of it having been through a Fannie or Freddie are going to be pretty high - so that’s the majority of mortgages. That information and sales data is saved. If it is something that it not brand new and either the owner or the previous own has had a conventional loan, then the chances are very high that they are going to get a property inspection waiver.
Waivers will only occur on properties already financed through Fannie or Freddie and there is a log of their past appraisal history.
Tara: The banks and credit unions that retain notes for their loan portfolio generally wouldn’t come up as eligible for a property inspection waiver.
So what do you think that homebuyers need to know right now - other than things are literally changing every day they need to have a mortgage professional keep them updated on appraisal processes?
Adam: The first thing is that we want to get the information out there to buyers that restrictions and requirements have changed to make it easier to get an appraisal for your home loan right now. I had someone call me the other day and ask if you can even buy a home right now.
The most important piece of information is that yes, you can buy a home, and here is how the appraisal is done. A lot of times, the entire process can be be digital, and in terms of the appraisal process that is not typically digital, we are getting waivers when Fannie or Freddie already have the data they need to determine value, and the risk is so low for them based upon that information, that they are accepting that value.
If you don’t get a property inspection waiver, then exterior-only inspections can be done with all of the accurate and same data that they need to complete a report to come up with an accurate value.
Is this a change in the appraisal process that will stick after the COVID-19 pandemic has retreated?
Tara: I don’t think so.
Adam: No. The exterior-only, no. That will definitely go back as soon as they feel comfortable taking it away nationwide, when shelter-in-place has been lifted. The exterior-only appraisal specifically, for government definitely, and probably for conventional loans, will go back to the process pre-COVID-19. The waivers, they actually started before this health crisis, and it was just expanded for the shelter-in-place orders. PWI will continue, especially if Fannie or Freddie already have current transaction data or if they already hold the risk, or they have all the data from previous sales. That may stick.
Tara: It might seem contradictory that we have said that we have confidence in the desktop appraisals, and then as soon as things aren’t shelter-in-place that will go away. It’s important to point out that the reason we are confident in the desktop appraisals is because appraisals are so highly regulated that Fannie and Freddie have confidence in previous appraisals that have been done. If you’ve bought a home, or refinanced a home where an appraisal was done, that data exists and is reliable.
If you have an extended period of time, though, when appraisals aren’t done - not only until mid-summer or fall if shelter-in-place is extended - but if it never went back to traditional appraisals, then that confidence would go down because you won’t have appraisers going into homes, making sure that data is current and accurate.
We want to make sure that consumers know that they are buying a home that is worth what the loan says that it is worth. That is the reason the appraisal process will go back fairly quickly to pre-COVID regulations.
There are still some restrictions right now - new construction, renovations, home improvement loans - but at Guaranteed Rate, we feel like the industry as a whole is working to ensure that the consumer doesn’t feel a profoundly negative impact from COVID-19. People still have to move, they have to buy homes, and they have to get on with their lives. The industry is doing a good job at making it work. It’s a good three- four-month solution, and won’t have any long term detriment on the bank of home data that is drawn upon for mortgages.