WHAT IS No-Appraisal Loan
A no-appraisal loan is a mortgage that does not require an appraisal of the property’s current market value. A no-appraisal loan may use alternative methods of determining a home’s value for the purpose of defining how much money to lend, or it may not require professional assessment of the home’s current market value, just information on the borrower’s loan balance and finances.
BREAKING DOWN No-Appraisal Loan
A no-appraisal loan is highly unusual and is rarely offered to a borrower purchasing a residential property for private use. The risk to a lender is simply too great if there is no impartial assessment of the value of the property the lender is financing. If the property is worth far less than the amount of the mortgage, a homeowner who defaults on the mortgage leaves the lender with no ability to recover the value of the loan by selling the property.
No-appraisal loans make sense for investors who will be altering or bundling the property in a way that makes a current valuation invalid for the final project. They also make sense for investors who are putting in much more than the standard 20 percent of the value of the property. But both of these are specialty situations that do not apply to the average buyer. A no-appraisal refinance loan may be referred to as a no-appraisal loan, but a first-time mortgage and a mortgage refinance function differently, and the reasons for offering each of them with no appraisal differ.
No-Appraisal Loans vs No-Appraisal Refinances
Most first mortgages do require appraisals, but a mortgage refinance, called a re-fi, may not need an appraisal depending on where the first mortgage originates. A mortgage refinance is a loan that pays off the original mortgage and takes the place of the first mortgage. The homeowner makes monthly or biweekly payments on the refinance just as they did on the original mortgage. A homeowner will re-fi in order to get a better interest rate if interest rates go down, to add or take someone off the original mortgage, or if the market changes and they suddenly have more equity in the property and could get a better rate because of that. There are some federal programs that offer refinances without appraisals. These re-fis are offered as a benefit to the homeowners to help ensure that they don’t default on the first mortgage and can stay in their homes, because this provides stability to the community. For this reason, only certain homeowners in certain high-risk categories are eligible for no-appraisal refinances.
Homeowners in these categories who are eligible for no-appraisal refinances have usually not been offered no-appraisal initial loans. The reason for this is that it is important for lenders, even when the lender is the U.S. government, to lend the correct amount of money to pay for a property, so the homeowner doesn’t get in trouble with payments and so the lender could recover the value of the loan if the property was sold. Since the purpose of a no-appraisal re-fi, however, is not to correctly value the property but to give the homeowner a better interest rate and easier monthly payment, the actual value of the property doesn’t really matter, so a no-appraisal re-fi makes sense.