Lenders Roll Out New Programs for Easier Homeownership: A Guide to No-Appraisal Loans

If you’ve been considering buying a home in the Seattle area, you’re probably well aware of how competitive things currently are

Homes sell in days, often for well over the asking price. International investors are also quick to swoop in and snap up properties in the most popular neighborhoods. The level of competition on the buyer’s side of things can make purchasing a home seem too difficult, or even impossible.

Unfortunately, the housing market shows no signs of slowing down in upcoming months. Although the coronavirus pandemic initially caused both housing supply and buyer demand to plummet, high costs didn’t follow suit. 

And now as supply and demand ramp back up, the housing market in Seattle is back to being a high-cost, highly competitive arena. This makes transitioning from renting to owning a home very difficult in Seattle. 

Lenders have taken note of the influx of investment purchases and have created new programs in the hope of enticing more owner-occupants into the Seattle housing market. The biggest and most potentially impactful of these programs is the no-appraisal loan.

What Is a No-Appraisal Loan?

Part of the typical home loan process is the appraisal. An appraisal is a professional estimate of the current market value of the home in question to determine how much money can be loaned out. 

Without an appraisal, loaning to a borrower can be too great of a risk for the lender. For example, if the home is actually worth a lot less than the initial loan without review, and the borrower defaults, then the lender won’t be able to recover the full value of the home.

[Related: The Best Times to Buy a House in Seattle]

What Is the No-Appraisal Loan Process?

In general, most lenders want to be able to sell their mortgages on to a third party after closing. Most of the time, your mortgage will get sold to Fannie Mae or Freddie Mac. These government-run programs were created specifically to purchase mortgages and keep lenders lending to new buyers. 

All of this is done with the intention of promoting homeownership among Americans. Because investors are pushing buyers out in major markets, programs are changing to better help people become new homeowners.

You won’t have to do anything special to qualify for a no-appraisal loan, although homeowners who borrow less than 70% of a property’s value have a greater chance of being approved. Your lender will work with either Fannie Mae or Freddie Mac to see if your property can qualify. Older properties and homes in commercial and retail shared spaces are more difficult to value without an appraisal, and therefore are less likely to qualify for no-appraisal loans.

Fannie Mae and Freddie Mac each have their own internal system which looks at documentation, including past appraisals and current market prices in your area, to determine if both you as a buyer and the home you’re buying qualify.

[Related: Make Sure You Have These Supporting Documents for Loan Approval]

Why Do Lenders Offer No-Appraisal Loans?

One of the reasons that investors can make such enticing offers is because they often purchase homes without traditional financing. A cash offer on a home may not be for more money, but it carries far less risk of complications preventing the completion of the sale. 

When a financed buyer comes to the table, the property typically needs to pass an inspection and undergo an appraisal to ensure the amount financed is justified. Issues with either could result in the sale falling through and delays for the seller.

By waiving the requirement for appraisals on certain purchases, lenders are able to help potential owner-occupants make more attractive offers during a very competitive seller’s market. 

Most sellers would prefer that their homes go to a family or an individual who will love and maintain the home for years. Investors won’t care about the home so much as the revenue it generates. An offer including a no-appraisal loan can help improve the odds of a seller selecting your offer.

The Coronavirus’s Impact on No-Appraisal Loans

Because of the coronavirus’s impact on the housing market, no-appraisal loans have increased in frequency. Fannie Mae and Freddie Mac have expanded their appraisal waivers, as long as the home in question doesn’t raise any red flags such as disproportionate loan-to-value ratio, and the borrower has a passable credit score and assets. 

Richard Pisnoy, co-founder of New York’s Silver Fin Capital, has reported seeing an increase of no-appraisal loans from 10% to almost one-third of all borrowers.

Program Requirements for No-Appraisal Mortgages

Freddie Mac and Fannie Mae have their own unique requirements. 

Freddie Mac is slightly more restrictive. In order for your lender to approve you for a no-appraisal loan, you need to come to the table with a down payment of at least 20 percent. The home must be a single-unit dwelling and also a single-family residence that acts as the borrower’s primary residence.

[Related: 15 Essential Questions to Ask When Buying a Home]

For Fannie Mae, no-appraisal homes may be available on a broader range of properties. They also require that the borrower have at least 20 percent equity via a down payment. The home itself can be a single-family home or a condominium unit. Both primary residences and second homes may qualify.

Provided that there are not major physical issues with the home and that the borrower meets requirements, the potential for a no-appraisal mortgage is there. For potential buyers, this system could help more of them become homeowners in the near future by making their offers more competitive.

Seattle Mortgage Planners is ready to assist with any questions or concerns you might have regarding your loan options. From jumbo loans to no-appraisal loans and everything in between — we’ve got your back. Contact us using our online form or schedule a call with us today!

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