Lender’s use appraisal reports to get feedback on the property’s fair market value and condition.
While appraisal reports have been widely adopted over the last half century, recent data calls into question the legitimacy and bias of home valuations given by appraisers.
Aggregator Fannie Mae has studied millions of appraisal reports over the last couple of years. They concluded that homes owned by white borrowers were more frequently overvalued compared to Black borrowers.1
The disparity was about 10%, meaning for the average $250,000 home, the value was off nearly $25,000.1 The Appraisal Institute has even acknowledged that appraisal bias has become a systemic issue that needs to be addressed.2
In an effort to help eliminate appraisal bias and leverage the power of big data, both Fannie Mae and Freddie Mac plan to permit desktop appraisals for eligible files starting in March 2022.
Compared to a traditional appraisal report, desktop appraisals do not require the appraiser to complete a physical inspection of the subject property. Nevertheless, testing shows similar risk performance between transactions using desktop appraisal and those using traditional reports.
Overall, desktop appraisals should help eliminate bias around properties located in specific neighborhoods by making the process almost completely digital. It should also cut down on delivery times and improve costs, helping to streamline the valuation process.
Not every new mortgage application will be eligible for a desktop appraisal. If you are considering a new home purchase or refinance, here is the eligibility criteria for using a desktop appraisal for your next mortgage transaction.
Who Qualifies to Use a Desktop Appraisal?
Lenders should soon see the option to obtain a desktop appraisal for eligible files starting around the weekend of March 19, 2022.
When a mortgage loan is submitted through Fannie Mae or Freddie Mac’s automated underwriting systems (AUS), new messaging will designate whether a file is eligible for a desktop appraisal or not. If a file is also eligible for an appraisal or property inspection waiver (PIW), that messaging will also populate.
Initially, desktop appraisals will only be granted to borrowers purchasing an existing 1-unit single family home or a planned unit development (PUD).3 Properties with a designated use as either a second home or rental property are ineligible for a desktop appraisal at this time.3
Another key stipulation to qualify for a desktop appraisal over a traditional appraisal inspection is that the new loan must not be greater than 90% of the lesser of the purchase price or appraised value.3
It’s important to note that lenders do have discretion when opting for which appraisal option they want to utilize based on underlying risk factors associated with your transaction.
For example, you could receive the option for a desktop appraisal but your lender, for whatever reason, may require a full, traditional appraisal. Similarly, if granted an appraisal or property inspection waiver (PIW), your lender could accept this in lieu of obtaining an appraisal altogether.
Also keep in mind that if you put down less than 20% on a new home and are applying for a conforming loan, you will be required to obtain private mortgage insurance (PMI).
How is a Desktop Appraisal Different?
Desktop appraisals are not all that much different than a traditional appraisal report. However, there are a few key differences that you should be aware of.
For starters, Fannie Mae and Freddie Mac have revamped a new form specifically designated for desktop appraisal report: 1004 Desktop. When you get your report, you will notice that it will have many similarities to a standard appraisal on form 1004.
Appraisers must have sufficient information to develop a complete and reliable report when using the new form. This includes obtaining information from public records, along with various secondary and third-party sources.
A key difference to a desktop appraisal is that an appraiser will no longer be required to complete a physical inspection of the subject property.4 Instead, the appraiser can rely on photos from various sources including the MLS listing.3
They can also inspect the property via a live, virtual walkthrough with the existing homeowner and utilize any photos taken throughout the inspection.3
Lastly, the report must include a formal floor plan with interior walls. This is slightly different from previous standards which were to include a rudimentary sketch of the property that really only outlined the exterior dimensions.
Historically, the real estate and mortgage industries have been late to digitize processes that would strengthen the home financing process for consumers. But with recent changes to the home valuation process, this could help strengthen the industry for all interested parties.
With the new implementation of desktop appraisals, eligible borrowers may soon find the process to be easier and turn times improve.
While desktop appraisals will only initially be permitted for specific primary residence purchases, their mainstream adoption will help reduce appraisal bias, increase efficiency industry-wide, and potentially save borrowers time and money.
1 Fannie Mae, Williamson, J., & Palim, M. (2022, January). Appraising the Appraisal. Appraising the Appraisal. https://www.fanniemae.com/media/42541/display
2 Schley, R. (2021, November 24). “Bias has no place in appraisal”: Appraisal Institute pres. Inman. Retrieved February 14, 2022, from https://www.inman.com/2021/11/24/bias-has-no-place-in-appraisal-appraisal-institute-president/
3 Fannie Mae. (2022, January 19). Desktop Underwriter/Desktop Originator Release Notes [Press release]. https://singlefamily.fanniemae.com/media/30336/display
4 Fannie Mae. (2022a, January). About Desktop Appraisals. https://singlefamily.fanniemae.com/media/30361/display