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 mortgage loans are rarely offered to borrowers purchasing residential property.
With no-appraisal loans, the risk to a mortgage lender is significant since there is no impartial assessment of the property's value that the lender is financing. If a homeowner defaults on the mortgage, and it turns out that the property is worth less than the loan, the lender would not be able to recoup the full value of the loan after selling the property.
Key Takeaways
- A no-appraisal loan is a mortgage that does not require a professional estimate of the property's value, called an appraisal.
- No-appraisal loans are usually rarely offered to borrowers buying residential property.
- No-appraisal loans can be risky for lenders since there's no impartial assessment of the property, which serves as collateral for the loan.
- Without an appraisal, the lender can lose money if the homeowner defaults on the mortgage and the property is worth less than the loan.
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. However, 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.
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 require appraisals, but a mortgage refinance, called a refi, may not need an appraisal, depending on where the first mortgage originates. A mortgage refinance is a loan offered through a mortgage lender that pays off the original mortgage, replacing the first mortgage. The homeowner makes monthly or biweekly payments on the refinanced mortgage just as they did on the original mortgage.
Typically, homeowners refinance their mortgage loans to improve the terms on their loan. For example, if mortgage rates have dropped significantly, a borrower might refinance their loan at the lower rate to reduce the monthly payment or shorten the length of the loan.
Sometimes, a homeowner's home equity can increase due to a rise in local property values. As a result, the borrower might opt for a cash-out refinance, which is when the loan is refinanced, and a portion of the equity or increased value is taken as cash at the loan closing.
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 or refis. In 2017, the government-sponsored lenders Fannie Mae and Freddie Mac began offering appraisal waivers in some select cases, both for refinance loans and original home purchase loans.
The Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) have similar streamlined programs.
Federal refis 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.
However, since the purpose of a no-appraisal refi is to ease the homeowner's terms and payments, the actual value of the property through an appraisal is not as relevant.
Can a Loan Be Approved Without an Appraisal?
Typically, a first mortgage loan requires an appraisal of the property. However, a no-appraisal loan might be an option when refinancing an existing mortgage loan.
When Would a Lender Not Require an Appraisal?
If the loan is federally insured, the lender is shielded from default risk. As a result, some federal programs offer no-appraisal mortgages or refis, including Fannie Mae and Freddie Mac.Also, the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) have similar programs.
What Are Appraisal Costs?
Appraisal costs are the fees charged for inspecting a property to determine its proper value. A home could have defects, negatively impacting the appraisal's value or home improvements, boosting the value. The property size and location can also impact the appraisal, which can easily range from $500 to $1,000.
The Bottom Line
A no-appraisal loan is a mortgage that doesn't require a professional estimate of the property's value and is not offered frequently to borrowers buying residential property. Mortgage lenders have an added risk with no-appraisal loans since they may not have an accurate and current market value of the property used as collateral for the loan.
Although most first mortgage loans require an appraisal, there are some instances where a refinancing of an existing mortgage may not need an appraisal. However, there might be conditions such as an appraisal was done when the first mortgage loan was extended.
