Is an Appraisal Required

For most conventional loans, the lender is responsible for obtaining a signed and complete appraisal report that accurately reflects the market value, condition, and marketability of the property. However, for certain loan casefiles, automated underwriting systems like Desktop Underwriter (DU) or Loan Product Advisor (LPA) may offer an appraisal waiver, now referred to as value acceptance or automated collateral evaluation (ACE). If the lender exercises this option and complies with related requirements, an appraisal is not required. This option is generally available for specific transaction types where the risk model determines the estimated value is sufficiently supported by existing data.

Even if a loan seems low-risk, specific transactions are strictly ineligible for value acceptance or ACE offers. These typically include properties with two to four units, co-op units, and manufactured homes. Additionally, leasehold properties, construction-to-permanent loans (both single-close and two-close), and transactions involving Texas Section 50(a)(6) loans are ineligible. Value acceptance is also unavailable for transactions where the purchase price or estimated value is $1,000,000 or more, or involving gifts of equity. Furthermore, manual underwriting does not qualify for these waivers; the loan must receive an Approve/Eligible recommendation from the automated system to consider a waiver.

Generally, an appraisal must be performed within the 12 months prior to the date of the note and mortgage. However, if the effective date of the appraisal is more than four months (120 days) but less than 12 months from the note date, the appraiser must perform an appraisal update. This update typically requires an exterior inspection to review current market data and ensure the property value has not declined since the original report. If the appraisal is older than 12 months, a new appraisal is required to proceed with the transaction.

A desktop appraisal allows an appraiser to perform the valuation without a physical inspection of the subject property, relying instead on data from alternative sources like floor plans and third-party photos. This option is permitted for eligible transactions, which generally include one-unit principal residence purchase transactions with a loan-to-value (LTV) ratio of less than or equal to 90%. The loan casefile must receive an Approve/Eligible recommendation from the automated underwriting system. Desktop appraisals are not permitted for second homes, investment properties, cash-out refinances, or construction-to-permanent loans. The appraisal must still produce a credible report reflecting property features and condition.

If a lender obtains an appraisal for a transaction that was eligible for value acceptance (or ACE), the lender generally may not exercise the waiver offer. In this scenario, the appraisal must be used for the valuation of the transaction. This policy prevents “adverse selection,” where a lender might only use a waiver if the appraisal comes in low. Exceptions exist for High LTV Refinance loans, where a lender must obtain an appraisal if required by law, but may still exercise the waiver offer if one was provided by the underwriting system.

This option allows lenders to forgo a traditional appraisal in favor of collecting specific property data. For Fannie Mae, this is “value acceptance + property data,” which requires interior and exterior data collection by a vetted third party to verify property eligibility. Similarly, Freddie Mac uses “ACE+ PDR” (Property Data Report). This process does not require a value opinion from an appraiser but demands a visual observation to ensure the property meets safety and soundness standards. If the data collection reveals issues, such as incomplete construction or safety hazards, a full appraisal or repairs may subsequently be required.

If an appraisal is completed “subject to” repairs, alterations, or inspections, the lender must verify that these conditions are met before the loan is sold. Verification is typically achieved through an Appraisal Update and/or Completion Report (Form 1004D) completed by the appraiser. In some cases, for new or proposed construction, a borrower/builder attestation letter accompanied by supporting evidence (like photos) may be used in lieu of Form 1004D to confirm completion according to plans. For existing construction with minor deferred maintenance that does not affect safety or soundness, the appraisal may be completed “as-is” without requiring immediate repair.

For High LTV Refinance loans, an appraisal is generally required and must include an interior and exterior inspection. However, automated underwriting systems may offer value acceptance (or ACE) for certain loan casefiles, allowing the lender to proceed without a new appraisal. If a lender exercises the value acceptance offer, they must deliver the loan with specific Special Feature Codes. Unlike standard transactions, if a lender is required by law to obtain an appraisal for a High LTV Refinance, they may still exercise the value acceptance offer provided by the automated system.

When a property is located in a FEMA-Declared Disaster Area eligible for Individual Assistance, lenders must determine if the property has been damaged. If the appraisal was completed prior to the disaster, the appraiser may need to perform a new inspection or provide a damage inspection report to confirm the property condition has not materially changed. For loans with value acceptance offers, the offer may be suspended in disaster areas, forcing the lender to obtain an appraisal or a property inspection to ensure the home’s safety and soundness before delivery.

Appraisals for condo units require analysis of both the individual unit and the project itself. The appraiser must report on the specific form (Form 1073 for Fannie Mae) and evaluate project amenities, location, and the homeowner association’s budget. The value of a condo unit depends heavily on the marketability of the project, so appraisers must analyze comparable sales from within the project and outside of it to demonstrate market acceptance. If the project is new or recently converted, additional data regarding sales and presales is often required to establish value.