Are Automated Appraisals the Wave of the Future?

Written by
David Mully
Read Time: 7 minutes

Appraisals have long been a necessary, if sometimes frustrating, part of the mortgage-lending business. Before lenders approve a purchase mortgage or refinance, they’ll send an appraiser to determine the current market value of a home.

It’s a step that takes time and costs money, with homeowners either seeking a refinance or buying a home having to pay from $400 to $600 on average for an appraisal. But there is a new trend in the mortgage business that might provide consumers a break on paying for these services: automated appraisals.

In an automated appraisal, data-analysis software analyzes comparable home sales and other factors to determine a valuation in seconds. This eliminates the need for an appraiser and can speed up the mortgage process. Some lenders say the trend is moving toward more automated appraisals for all types of loans, from refinances and conventional loans to home-equity loans and FHA-insured mortgages.

The lending world isn’t there yet. But automated appraisals have gotten a push thanks to the efforts of giant mortgage investors Fannie Mae and Freddie Mac, two companies that buy and insure a large percentage of the mortgage loans originated in the United States. Both companies are embracing automated appraisals, and this could mean that more mortgages won’t require a human appraiser.

Appraisers still needed

But mortgage professionals do say that automation will never fully replace appraisers, as some properties simply need the human touch for an accurate valuation.

Joseph Lynch, a certified residential appraiser and owner of Joseph Lynch Appraisal Services in Woodland, California, said that automated appraisals work better for some properties than others.

A refinance of a home in a subdivision where all the residences are similar and there have been many recent sales is a good candidate for an automated appraisal, Lynch said. The automated valuation model will consider the recent sales and will more likely come up with a solid value for the home being appraised.

In other cases, a valuation compiled by an actual appraiser is the better choice, Lynch said. This is the case in areas in which there are few comparable home sales for a residence. If automated models can't rely on a large enough number of sales of similar homes, they are less likely to come up with an accurate valuation. An appraiser, though, can rely on factors such as number of bedrooms, the age of a home, its square footage and any extra amenities its owners have added to come up with an accurate market value.

"Neighborhoods with custom homes with differing quality, places with differing views and areas where public record data sources are unreliable are other markets where automated valuation models fail,” Lynch said. “In general, the more complex the property and market, the less reliable the automated valuation model."

Fannie, Freddie dive into automation

Fannie Mae launched its new Property Inspection Waiver program in late 2016. For some refinances in which a recent appraisal is already on file, Fannie Mae is willing to waive an appraisal.

Fannie Mae said that refinances on one-unit properties, including condominiums; principal residences; second homes; and investment properties are eligible for the Property Inspection Waiver program. Fannie Mae said that as many as 25 percent of the refis that it backs will receive an appraisal waiver.

Fannie Mae said that purchase mortgage loans and most refinance transactions will still not receive an appraisal waiver. However, when borrowers seeking a refinance are extremely qualified -- they have high credit scores, low debt-to-income ratios and steady job histories -- the odds are higher for a waiver. That's because there is less risk to the lender when borrowers have shown a history of paying their bills on time, managing their credit and bringing in a steady income stream.

Freddie Mac has paved the way for automated appraisals, too, through its LoanAdvisor Suite, adding new automated capabilities to the suite starting this spring.

According to Freddie Mac, one of the new features is an automated appraisal option. David Lowman, executive vice president of Freddie Mac's single-family business said in a statement that the company has more than 40 years of historical data that it can use to generate accurate automated valuations of homes.

Automated appraisals for purchase loans, too

What's interesting about the Freddie Mac system is that it will allow automated appraisals not only on refinances but on some purchase mortgages, too, mostly for properties that have had recent appraisals done on them and have plenty of comparable sales. Freddie Mac told industry publication Valuation Review in its Jan. 2 edition that most mortgage loans will still require a traditional appraisal.

Brandon Boudreau, chief operating officer of Metro-West Appraisal in Detroit, said that it makes sense that Freddie and Fannie would embrace automated appraisals. Both companies have amassed plenty of data on homes across the country. This gives them deep insight into the value of these properties, Boudreau said.

But Boudreau also said that it's important to remember that the data both Fannie and Freddie have on home valuations did come originally from appraisers. This is why appraisers and traditional appraisals won't disappear, Boudreau said.

"It is a chicken-and-egg set-up," he said. "They can't do the automated appraisals without first having strong data from appraisers. They always need something to give them that strong data. Right now, that is appraisers."

A growing trend

Some mortgage professionals say that the moves by Fannie and Freddie are a sign that automated appraisals and appraisal waivers are a trend, and that’s good news for home buyers and owners hoping to save money on refis and purchase loans.

Casey Fleming, mortgage advisor with San Diego-based C2 Financial Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage, said that he expects even purchase mortgages to qualify soon for automated appraisals, especially in cases where borrowers are highly qualified.

There are plenty of benefits to automated appraisals, Fleming said. They should reduce the costs that borrowers pay for closing a mortgage loan as these borrowers won't be paying the $400 to $500 that a traditional appraisal typically costs. Also, automated appraisals will speed up the mortgage-lending process, as lenders won't be waiting for in-person appraisals to come through.

"The pro of automated valuations is that it is faster, less expensive and generally just as accurate, if not more so, than a conventional appraisal," Fleming said. "The drawback is that if you have improved your home significantly since you bought it, the system won't know that, and won't give you credit for it."

When automated makes sense

A.W. Pickel, a mortgage loan officer and Midwest division president of AmCap Mortgage in Overland Park, Kansas, said that he hopes that soon automated appraisals will be used for purchase loans.

"The best use for an automated appraisal would be when you a lot of properties that are similar in the same area," Pickel said. "Do you really need someone to do all that work to determine a home's value?"

Pickel said that an automated appraisal would be an especially smart move when both the buyer and seller of such a home has already agreed on a mutually acceptable price.

"If the contract is between a self-interested buyer and a self-interested seller, the true mark of a home's value is what people are willing to pay," Pickel said. "The seller wants to sell it at the highest price, while the buyer wants to purchase it at the lowest possible price. In a fair and accurate market, the two sides will arrive at the price that best reflects a home's true value. In such cases, and when there are plenty of comparable home sales to rely on, an automated appraisal is a good option."

Pickel said that the real estate industry will never do away with appraisers completely. There are some properties that require the human experience and knowledge of an appraiser. In such cases, appraisers remain a necessity.

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