You Might Not Need A Normal Appraisal Anymore

Certified Mortgage Advisor
NMLS 1701021
February 18, 2022

Getting rid of appraisals

Hello, you lovely people. Appraisals are changing. They're not going to look the same way in March for a few people and likely we're probably going to continue to see these changes happen here in the future. So Fannie Mae has laid out their plan for a desktop appraisal.

What is Fannie Mae?

So Fannie Mae is one type of conventional loan. You can also get a Freddie Mac, a conventional loan. Fannie Mae is basically one of the government-sponsored enterprises that make up the rules for conventional loans. So what they want to do is the transition from the traditional appraisal to a desktop appraisal.

Traditional appraisal

A traditional appraisal is we're appraiser is going to actually go to the house. They're going to take a walk through it, look at the condition. They're going to compare it to other similar homes and then come up with a value for that home to make sure that if you're buying a $400,000 home, it's worth $400,000. The bank doesn't want to lend $500,000 on a 400,000 home. That's not a very good business practice.

When will the change going to happen?

So they're planning this change for loans submitted after March 19th. This is only for Fannie Mae conventional at the moment. It's unclear Freddie Mac is going to follow suit, but most loans are painting me conventional.

So what is desktop appraisal?

This is when an appraiser uses data to find the value of a home, instead of actually physically going through the home, taking a walk through the home and it's called this because it's they can find the value from their like desktop. Instead of actually going to the house to take a look and find the value of it based on the condition of the home itself.

This is not scarier than COVID, it's actually better

At first, it sounds scary, but then we actually take a look into it. It's really not as scary, this is used on a lot of loans right now.

COVID made it the norm

Now this originally started becoming the main thing when COVID first started and lockdowns were happening, social distancing was happening. And Fannie Mae and Freddie Mac were trying to figure out how do we make sure that.

Appraisers don't have to go into a seller's home to find the value of it for a buyer for a new loan. And so they started doing more desktop appraisals and this proved to be a really good testing ground. It seemed like COVID has forced a lot of things to change and people to realize, oh yeah, we can work from home and profitability still increases, or we can do desktop appraisals and it still has a solid value of the home.

It forced us to test this appraisal due to COVID

So COVID was a good testing ground. For this to happen. Now they're pushing into that a little bit more of, okay, this works during COVID, how do we do more of these? Because this is a lot better for a lot of people.

Appraisal is already common

Something to note too, is appraisal waivers are already common using similar data. So an appraisal waiver is when you get a conventional loan and it goes through the underwriting software and it basically says, Hey, you don't need an appraisal at all.

So a desktop appraisal is where you go through the underwriting software. It says you do need an appraisal, but it can be a desktop appraisal. So an appraiser doesn't have to go out to the home. They can just find the value of the home based on a bunch of different data that they put together.

Data is more available

Also, data is more available. Every single year, we get more and more data that can be used in the real estate world. And this is helping the desktop appraisals as well. So they can use things like tax records, past sales as well.

And by April last year, more than 15% of loans through conventional loans use desktop appraisals. So this is already pretty common like 15% is a pretty large amount of conventional loans that didn't have a traditional appraisal they have a desktop appraisal.

General requirements

Now let's talk about some general requirements here really quickly.

1 unit primary residence

So this is only for one unit primary residence. So this cannot be any condo. So you have to live in the home for at least a year.

10% down

Also, you have to have a 10% down. So something to keep in mind, cause conventional loans do have a minimum of 5% down, but you do need 10%.

Must be approve/ eligible in AUS

Also, you have to have an approved, eligible loan in the underwriting software. This is something that you won't have access to, but your lender will run it through the underwriting software to get approved eligible. Basically, this means you have to be able to be approved for a conventional loan and you can not do any manual underwriting.

Fannie Mae's FAQ Guide

Then I want to talk a little bit about Fannie Mae does have this kind of FAQ Guide that shows a little bit of some more detail about it  So the software is going to tell the lender, Hey, this qualifies for a desktop appraisal, they're going to order it. The appraiser is then going to take that. And then this shows what the appraiser's going to do.

Appraisers use data from various sources, no more physical inspection

They don't have to do a physical inspection. They're going to use data from various sources, like the agents, the homeowner, the builder, the appraiser files, and secondary data sources.

Fannie Mae’s Desktop Appraisal PDF

Now something else that's interesting to know. You can check out this link if you want to take a look: Fannie Mae’s Desktop Appraisal PDF. It says, do homeowner-provided photos require verification?

So it says photos can be verified using an analyst's listing or with a live virtual walkthrough. The homeowner photos that are taken during a live walkthrough with the homeowner are considered an appraiser observation during a live event and do not require further verification.

They now use FaceTime

It's interesting because basically what they're saying here is instead of the appraiser, going to the home themselves to take a look at the condition of the home to find the value of the property, along with other comparable homes and adjustments.

They're actually going to be able to do thank you for that like a FaceTime and see, okay. Walk me through the home and let me make sure that condition matches. What's interesting here too, is the condition of the home most of the time isn't a huge factor in the actual value of the property. Most of the time, the value gets validated for a home-based on comparable homes.

So homes that are very similar to that one, they're doing an appraisal on, and then they're going to, they're going to find if this one has three beds, two baths, I want to find another one with three beds. Same similar square footage, similar features. What did those sell for? And that's what they're going to use to largely justify the value of this home, and then the condition can slightly affect the adjustments of the current home as well.

Lenders & home buyers can "always" opt out

Something else they mentioned here is a number nine at the bottom. They said lenders can always opt-out to order a traditional appraisal. If the borrower wants one, or for other reasons at this point, it's a little unclear if a desktop appraisal comes in lower than the contract price.

So let's say you're low, you're buying it for 400,000, and let's say the desktop appraisal comes in at 390. It's unclear if you can then get a traditional appraisal to see if you can get basically another shot at a higher value. Maybe it could come in at 400 or higher. It's unclear that something that you can do at the moment. But it does look like lenders use, or homeowners or homebuyers can opt-out if they want to if they just want to go with a traditional appraisal.

Cost less

So some pros are this is going to cost less than a traditional appraisal. Traditional appraisal normally is going to run around 500 to $700 depending on your area and what kind of competition is in there. So these appraisals should cost quite a bit less there because the appraiser doesn't have to spend the time to go out and actually inspect the home.

Also as more demand for appraisers increases, the cost of appraisal says also increases as well. My brother is a real estate agent and he was working with a client and they had a quote for a $1,200 appraisal just because there was such a shortage in appraisers. And it was a little bit more of a rural area.


So should hopefully bring down the cost of appraisals and then also speed up appraisals as well, especially if you're in a more rural area. Appraisers sometimes can take a week or two to actually even go out to the home to be able to inspect it with a desktop appraisal. This should be a lot quicker.

Collateral Underwriter as backup

Something that's really important to note here is that it's this isn't just like a system where an appraiser can go in and be like 300,000. Got it. That's it. There also is software. That's validating it as well. So the appraiser's going to submit their data, but lenders also have access to a tool called collateral underwriter and kind of thinking of it this way.

Everyone's used to understanding that they're going to be underwritten their risk for the loan is going to be underwritten. So a lender is going to say how risky. To lend to you, but they're also going to run a software that says how risky is it to lend on this home? And so it basically validates the appraisal using a scorecard to see how risky that appraisal is.

And so likely what's going to happen is there's going to be multiple software checks to validate the data and make sure an appraiser can't just put in whatever they want. There's going to be a risk level adjustment with that, that already happens right now with traditional appraisals is a traditional appraisal comes.

It actually gets underwritten through collateral underwriter gets underwritten by a software. Usually goes through a manual review by a collateral underwriter individual as well on top of the software. And they're going to look at the risk and if they're uncomfortable with what that appraisal says, they usually ask for revisions or potentially another appraisal to be done. This likely will be the same. For desktop appraisals as well.

Algorithms is more conservative

Usually, the value isn't going to be overstated the algorithms on these, anything for an appraisal waiver, a desktop appraisal, and the system for a collateral underwriter is usually very conservative. Anytime I look on the back end, if a traditional appraisal comes through and I can see the collateral underwriter report it's on a risk level.

Sometimes it's very interesting to see, if it, what kind of risk level it creates because there are plenty of loans that have gone through where the risk level is acceptable, but it's not the most. I guess are the least risky for the lender to take on. So usually these algorithms are a lot more conservative and aren't going to just validate anything.

Because I know there's a lot of fear that a lot of people have is as home prices continue to increase. Then Software just going to say yes to everything. That's not how it's going to work. There's going to have to be a lot of data that validates those home prices rather than just the opinion or the subject opinion of an appraiser.

It's difficult to be an appraiser

Also, appraisers are extremely overworked right now. It's difficult to become an appraiser. So just like we're experiencing a shortage in homes causing an increase in home prices. A shortage in appraisers also creates an increase in appraisal prices.

Desktop appraisal are usually lower

So some concierge desktop appraisal is usually lower than a traditional appraisal that you might run into. So this could cause an issue. If you're looking to buy a home and you want to buy it for 400,000 and the desktop appraisal comes in at 380. Okay, now that becomes an issue because the appraisal is short and I have a separate video on how to handle short appraisals.

Not good for homes in poor or highly upgrades condition

Also, this isn't good for homes that are in poor or highly upgraded condition, because again, it sounds like it's possible for the appraiser to use photos from things like the MLS or like a live walkthrough. But of course, it isn't always going to capture or help an appraiser understand fully what kind of upgrades are there or the full condition of the home.

More widespread usage

Then also with more widespread usage, there could be an opportunity for inaccurate data models to impact the market. So for instance, if they roll out this program to more loans it's possible that maybe they allowed too much risk that could impact the market. I don't see that happening, especially because there are already 15% homes or for 15% of transactions that have already been using desktop appraisals and they haven't seen any adverse effects.

Few incentives on over lend collateral

Keep in mind too. There's very little incentive for Fannie Mae to over lends on collateral. So when the housing crash happened and we saw overinflated appraisals coming through, that was because of appraisers, not because of the lenders themselves.

I'm sure there's. It works both ways. There, there were definitely shady characters on both sides. What's happening now is because of all the regulations of restrictions that are happening with appraisals and lenders is it really doesn't make sense for someone like Fannie Mae to lend $500,000 on a $400,000 home.

Because if someone couldn't pay that back and they foreclose, they're going to lose that money. If they have to sell that home for $400,000 and they have lent $500,000. They're going to take a bath on that. And so it doesn't really make sense for them to overvalue homes through the data that they have.

So it's going to be very interesting to see how this plays out when we get more end of the year as we see more of these desktop appraisals happening.

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