What Is a No-Appraisal Loan?
A no-appraisal loan is a mortgage that does not require a professional estimate of the collateral property’s current market value, known in real estate parlance as an appraisal. No-appraisal loans are highly unusual and 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 full value of the loan by selling the property.
How a No-Appraisal Loan Works
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.
No-appraisal loans tend to be available for investors who will be altering or bundling the property in a way that makes a current valuation invalid or moot. They also may be offered to investors who are putting in much more than the standard 20% down payment of the purchase price of the property. But both of these are special situations that do not apply to the average buyer.
A no-appraisal refinance loan may be referred to as a no-appraisal mortgage, but a first-time mortgage and a mortgage refinance function differently, and the reasons for offering each of them with no appraisal differ.
[Important: For the typical home buyer, a no-appraisal loan is highly unusual on a first mortgage, but it is more common when a mortgage is being refinanced.]
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 refinanced mortgage just as they did on the original mortgage.
Mortgage holders usually seek to re-fi in order to get better terms on their loans: a lower interest rate, hence smaller monthly payments, if interest rates have dropped significantly, for example. Or, perhaps, their equity in the home may have greatly increased due to a rise in local property values, thus qualifying them for a lower rate. Other motives for refinancing include the desire to add or remove another party from the original mortgage or to convert an adjustable rate mortgage (ARM) into a fixed-rate mortgage.
Real Life Examples of No-Appraisal Refinances
Some federal programs offer no-appraisal mortgages. For example, the U.S. Department of Veterans Affairs (VA) provides an interest rate reduction refinance loan (IRRRL) to those already holding VA loans; waiving the home appraisal is among its generous terms. The Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) have similar streamlined programs.
In 2017, the government-sponsored lenders Fannie Mae and Freddie Mac began offering appraisal waivers in some select cases, both for refinance loans and for original home purchase loans.
Federal re-fis help ensure that homeowners don’t default on the first mortgage and can stay in their homes, providing stability to the community and the local real estate market. For this reason, no-appraisal refinance opportunities often focus on certain high-risk categories of homeowners who were not offered an original no-appraisal loan.
The rationale of an appraisal 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 that the homeowner doesn’t get in trouble with payments and the lender could recover the value of the loan if the property were sold. But since the purpose of a no-appraisal re-fi is not to correctly value the property but to ease the homeowner's terms and payments, the actual value of the property doesn’t matter as much. That's why a no-appraisal re-fi can make sense.