by Maurie Backman | Feb. 14, 2021
Lenders are skipping this key step during the refinancing process -- and it could be working to homeowners' advantage.
Refinancing a mortgage isn't something that happens overnight. There are several steps that go into the process, which explains why it can easily take a good 30 days to close on a refinance.
Once you apply to refinance, your lender will need to verify your financial data through a process known as underwriting. Once that's complete, you'll generally need your home to go through an appraisal so your lender can get a sense of its market value.
But these days, a growing number of refinance lenders are waiving the appraisal requirement. In fact, roughly two-thirds of refinances have a waiver, and one-third of cash-out refinances have one. And that's actually a good thing for homeowners.
The purpose of an appraisal is to give a lender reassurance that your home is worth at least the amount you're looking to borrow. That way, if you fall behind on your mortgage payments, your lender can rest easy knowing that if the foreclosure process were to begin, there's a good chance it would recoup all of its money.
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Generally, an appraisal involves having an appraiser come out to your home and inspect its features and condition. Then, using that information coupled with housing market data, that appraiser will assign a value to your home. If you're looking to refinance a $250,000 mortgage and your home appraises for $300,000, you're all set. But if your home only appraises for $200,000, you'll likely be denied a loan. The reason? If you were to default on your mortgage, your home wouldn't be worth enough for your lender to get fully repaid.
Now you may find it surprising to learn that more and more lenders are waiving appraisals given the state of the economy. But while the economy may be in poor shape, the housing market is a different story.
Home values have skyrocketed in the course of the pandemic. In December of 2020, the median price of a home sold was nearly 13% higher than where it stood in December of 2019, according to the National Association of Realtors. As such, many homes are likely to appraise for much higher than they normally would, and so lenders aren't bothering with the formal process.
Also, home appraisals are a more precarious prospect during the pandemic. At a time when social distancing is key, many homeowners don't want an appraiser coming inside to look at their living space. Lenders are recognizing this and are waiving appraisals accordingly.
Of course, if you're not a particularly strong borrowing candidate -- meaning, you don't have a great credit score or you have a lot of debt -- then your refinance lender may not let you off the hook as far as an appraisal goes. But if your lender does waive that step, you may also reap some savings in the form of lower closing costs on your loan. In fact, when you shop around for a refinance, pay attention to whether each lender you seek an offer from will require an appraisal. It could work to your benefit to favor a lender that doesn't.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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