When you google “appraisal gap” — and I just did — a long list of search results appear. To my surprise, the top results did not link to economists expounding on the intricacies of home price fluctuations, the leading theories on avoiding overvaluation or pictures of stunt riders jumping over a canyon filled with printed PDF docs. (OK, throw that last one out.)
What I did see were links to lender websites almost apologetically explaining what an appraisal gap is to their customers and willing them not to panic if it happens to them. Well, a cure for appraisal gap anxiety has appeared on the scene.
An appraisal gap is the difference between what a buyer agreed to pay for a home in a purchase contract and what an appraiser concludes as the fair market value of the property. This is usually viewed as a problem when the appraised value is below the purchase contract amount since lenders will not approve a loan amount higher than the appraisal. And homebuyers certainly don’t want to overpay and start off their ownership journey with negative equity.
Depending on how the contract is written, the homebuyer must decide whether to walk away from the home they want, try to negotiate with the seller to bring the purchase price down or come up with the cash to make up the difference. All of these options create friction in the process, and the tighter the budget the more intense the friction can be.
Buying a home is not for the faint of heart, especially when inventory is so low and affordability is a challenge. The up-and-down emotions of finding the perfect home, trying to get an offer accepted and going through the multi-week approval process to make the biggest purchase of your life are not my idea of a good time.
Perhaps one of the hardest emotional aspects of the appraisal gap scenario is the lack of certainty. Because the appraisal isn’t ordered until after the purchase contract is complete, it could be a week or more until the borrower knows if there is a gap or not. I’m in the valuation industry and have every property tool at my disposal, but when buying my house I still waited for that appraisal to come in like it was a college acceptance letter.
As refinance volume has declined and purchase loans have become the dominant loan type, a number of lenders have rushed to create programs to give borrowers certainty earlier and remove the angst. Innovative lenders and power buyers like Tomo, Better, Ribbon and others rolled out appraisal gap programs to give their clients confidence to proceed with the loan process. Promising to protect borrowers from surprises, missed closings or having to scramble to find cash, these programs are designed to keep borrowers from shopping around to other lenders by offering a better experience.
In terms of agency solutions, Fannie Mae and Freddie Mac have been offering appraisal waivers on purchase loans, but the percentage of eligible loans has remained under 15%, which is not enough to provide a consistent experience.
The truth of it is that an appraisal coming in below the contract price can be a powerful tool for a homebuyer and save them future pain and heartache. Having an intelligent model providing upfront feedback on the likelihood of an offer being supported by an appraisal would be a welcome sanity check for consumers. Secondary market loan buyers would also rather see accurate values even if they agreed with the purchase price less often, which leads us to the recent news from Fannie Mae.
Fannie Mae recently announced the Value Acceptance + Property Data solution. On its surface it appears to be an appraisal alternative, but in listening to Fannie Mae’s public comments it is apparent that this program is extending the number of loans that are eligible for the idea of value certainty.
Lenders find out if a loan is eligible by submitting the purchase contract amount to Desktop Underwriter along with other loan data points. If they receive back a response that the value is accepted, then they have to order a property data collection from an approved vendor to complete the requirements. When you add Value Acceptance (the artist formerly known as appraisal waiver) with Value Acceptance + Property Data, the percentage of eligible purchase loans could be substantial.
The property data collection might take a few days based on someone gaining access to the property but the value acceptance is instant. I’m very curious to see how lenders will choose to communicate with the borrower. Will they approach it like the aforementioned appraisal protection programs and try to communicate certainty as soon as possible? Or wait until the property data collection is back? Either way, the Value Acceptance program is a significant step towards being a cure for appraisal gap anxiety.
I certainly want to see more programs like this that make appraisal gap anxiety the exception rather than the norm. Giving borrowers up front confidence in their purchase contract amount reduces friction for every stakeholder involved. Perhaps it will spark more focused innovation improving the offer process itself and take us one step closer to “buy it now” certainty. We will get a better sense once it becomes available April 15.