Do Conventional Loans Require an Appraisal? A Complete Guide

Getting a mortgage to buy a home is an exciting yet often stressful process. One key step is the appraisal, which determines if the home’s value matches the price you agreed to pay.

Appraisals are mandatory for most mortgage programs, including FHA and VA loans. But what about conventional loans from Fannie Mae and Freddie Mac?

In this comprehensive guide we’ll explain conventional loan appraisal requirements. including

• Why appraisals are needed for conventional loans
• When lenders can waive the appraisal
• Alternatives to a full appraisal
• How to dispute a low appraisal value

Why Conventional Loans Require Appraisals

An appraisal serves two key purposes:

1. Protects the lender – The appraisal confirms the home is worth at least the purchase price. This reduces the lender’s risk if they ever had to foreclose and resell the property.

2. Protects the borrower – The appraisal prevents borrowers from overpaying for a home It ensures you don’t end up “upside down” on your mortgage from day one.

For these reasons, Fannie Mae and Freddie Mac require lenders to obtain an appraisal for most conventional purchase loans and refinances.

These government-sponsored enterprises set the guidelines for conventional conforming loans. Any mortgage that follows their rules can be sold to them on the secondary market after closing.

So while lenders have some wiggle room, they must order an appraisal to be able to sell your loan to Fannie and Freddie.

When Lenders Can Waive the Appraisal

There are a handful of low-risk situations where lenders can waive the appraisal entirely:

1. You’re refinancing with the same lender – Called a “limited cash-out” refi, your existing bank already knows the home’s value from the previous purchase or refinance appraisal. As long as you’re not taking out significant equity beyond closing costs, they may waive the appraisal requirement.

2. You’re putting down a large down payment – If your down payment or equity position exceeds 20%, lenders may waive the appraisal. The large equity cushion reduces their risk enough to where an appraisal is considered unnecessary.

3. It’s a low-balance loan – For refinances under $50,000, lenders can often waive the appraisal. The idea is that the small loan amount poses little risk even if the home value drops.

4. You’re applying for a “streamlined” refinance program – Some refi programs designed for existing Fannie/Freddie loan holders make it easy to refinance into a lower rate without an appraisal.

Outside of those exceptions, you can expect the lender to order an appraisal.

Alternatives to a Full Appraisal

In some cases, lenders can order an alternative valuation option in lieu of a full interior/exterior appraisal:

• Exterior-only appraisal – The appraiser will visually inspect only the exterior and not go inside. This saves time and money but may yield a more conservative value. Lenders will generally only accept these reports on refinances, not purchases.

• Automated Valuation Model (AVM) – Computer software estimates the home’s value based on public records, nearby sales, and other data. AVMs provide a quick and low-cost value option but may not be as accurate as an appraiser’s value opinion.

• Desktop appraisal – A licensed appraiser will estimate the value without visiting the property in person. They rely on public records, sales data, and street-view imagery instead. Desktop appraisals cost less than a full appraisal but may also result in a lower value.

• Brokers Price Opinion (BPO) – Your real estate agent or another local agent will estimate the value based on their expertise. Lenders may accept BPOs on low-risk refinances.

• Tax assessment value – Some lenders will consider the home’s assessed value for tax purposes as a data point on refinances, often in combination with an AVM report. But generally tax assessments alone aren’t enough.

These alternatives provide cheaper and quicker turnaround times versus an onsite appraisal. But the lender still gets a general idea of the property’s market value, which satisfies the GSEs’ requirements.

What if the Appraisal Comes in Low? How to Dispute It

It’s pretty common to think you overpaid after reviewing the appraisal. But major inaccuracies are less frequent.

If you truly feel the appraisal value is way off, act quickly to dispute it:

Provide additional comps – Ask your real estate agent to send over a few recently sold homes that justify the contract price (ideally higher sales). Make sure they’re truly comparable – same size, condition, upgrades, location, etc.

Ask the lender to order a second appraisal – The lender isn’t obligated to, but may agree to if you cover the cost of the new appraisal. You could also request a review of the initial report.

File a complaint against the appraiser – If you have evidence the original appraiser is incompetent or unethical, file a complaint with the state licensing board. But keep in mind low values alone don’t necessarily indicate wrongdoing.

Switch lenders and start over – As a last resort, you may be able to withdraw your application and apply with a new lender who will order their own independent appraisal. But expect to lose application fees and start the process over.

Negotiate with the seller – If there’s no error with the appraisal, negotiate with the seller to drop the price to match the home’s actual value. Or agree to split the difference.

Bring extra cash to closing – If the low appraisal is simply due to recent price drops in the neighborhood, you may be able to pay the difference out of pocket to match the contract price.

Cancel the deal – If you can’t come to agreeable terms with the seller, you can walk away and get your earnest money deposit back, assuming your contract contained an appraisal contingency.

The good news is very few deals fall apart solely due to a low appraisal. With good communication between all parties, there are usually solutions like re-negotiating the price or bringing extra cash to close.

But it underscores the importance of having your own agent analyze comps before making an offer, so you can avoid overpaying from the start.

FHA Appraisal Requirements vs Conventional

We’ve established conventional loans require appraisals in most cases. But how do their requirements compare to FHA loans?

The main differences include:

• FHA appraisers must be on the FHA roster. Conventional lenders aren’t as limited in who they pick.

• FHA appraisals scrutinize minimum property requirements (MPRs) set by HUD. Conventional appraisals follow GSE guidelines which are less strict.

• FHA is more specific about what appraisers must check – utilities, paint, roof, etc. Conventional guidelines are more general (look for safety hazards and issues that may make the home hard to resell).

• An FHA appraisal costs more on average.

In reality, both will identify any major defects that make the home unsafe or unlivable. But FHA guidelines lead appraisers to be a bit more nitpicky.

As a result, borrowers often feel conventional loans are easier to pass appraisal. But you can still run into issues with either loan type if the home has deferred maintenance or other problems.

The best way to avoid appraisal headaches? Have professionals review the property before making an offer, so you have a good sense of its true market value.

The Importance of an Accurate Appraisal

Mortgage borrowers aren’t the only ones who benefit from an unbiased appraisal. Lenders, real estate agents, appraisers themselves, and the broader housing market all have a vested interest in keeping appraisals accurate and ethical.

For example:

• Home sellers (and their agents) want to prevent buyers from using a deliberately low appraisal to negotiate down the price after having an offer accepted.

• Lenders want to prevent inflated appraisals that approve loans larger than what properties are actually worth.

• Appraisers have an ethical duty to remain impartial and render credible opinions of value regardless of other parties hoping for a certain outcome.

When appraisals are artificially skewed – whether lower or higher than reality – it introduces risk and uncertainty into real estate transactions. It can lead to deals falling through, confused home buyers and sellers, and losses for lenders.

Mortgage loans depend on public confidence in the appraisal process. When trust in appraisals erodes, buyers, sellers, and lenders all suffer consequences.

That’s why processes are in place to keep app