FHA Streamline Refinancing: When Do You Need an Appraisal?
One of the major selling points for the FHA Streamline Refinance is the fact that you can complete the process without an appraisal. However, in some cases, an appraisal may be required by the lender before servicing this program. Let’s look at how appraisals are used and when you may need one for an FHA Streamline Refinance.
What is an Appraisal?
A home appraisal is essentially an assessment of the value of your home. During an appraisal, a trained professional, known as an appraiser, will inspect the home and property to make a highly educated guess as to the value of your home.
The appraiser will consider numerous of factors, including:
Number of rooms
Number of bathrooms
Quality of materials (countertops, etc.)
Age of flooring
Area home prices
Using a vast amount of information, the appraiser will then state what they believe your home is worth. This is, however, little more than a professional guess; it’s certainly not the mandatory selling price for a home, but merely what the appraiser believes would be a fair sales price.
Why are Appraisals Required Before Most Home Loans?
Lenders rarely offer loans on homes that have not been appraised. Knowing the home’s value is essential to reducing their overall risk. Basically, banks and lenders want to know how much a home is worth so that in the event of a foreclosure they will be able to recover the money that was lent.
For example, let’s say a bank lends $300,000 on a home that is actually worth $200,000. If the loan goes into foreclosure, the bank will sell the home, but because the house is only worth $200,000, they won’t recover their full loan amount. Appraisals, therefore, act a safety measure to ensure that the homes they are lending on are actually worth the money.
Results of a Low Appraisal
Having a home appraised at a price that is too high is generally not a concern for lenders. However, if the appraisal comes in low, it makes lenders and banks nervous. If the home is worth less than they are lending, they may stop the loan.
FHA Streamline Refinancing: No Appraisal, Less Hassle
Because a professional needs to be hired, appraisals take time and money to complete. This is why skipping the appraisal process can be extremely beneficial. Another reason is that lenders use the previous appraised value of the home; if the home has likely gone down in value since you took out the original loan, it doesn’t matter because only the past value is used. This completely bypasses the chance that lenders could decline the refinancing because of a drop in value.
When is an Appraisal Required for FHA Streamline Refinancing?
While the major advantage of using this program is that you can refinance without an appraisal, there is one major situation when an appraisal will be required: when you plan on rolling the closing costs into your loan.
If you are paying for closing costs upfront, then you will be able to complete the refinance without the appraisal. However, if you want to roll the costs into the loan, which means they will be added to the loan balance and repaid over the life of the loan, you will have to have an appraisal.
Another reason that you may need an appraisal is simply because your lender requires it. While the FHA guidelines do not require an appraisal, a lender can request one if they wish. If you want, you could simply find another lender that does not require appraisals, but lenders may offer slightly lower rates if an appraisal, which helps reduce risk, is completed. For example, you might spend about $400 on an appraisal, but you could get a .25% reduction on your interest rate. That may not seem like much, but it could result in significant savings over the life of a 30-year loan.
Getting an appraisal on an FHA Streamline Refinancing may seem silly, but it can actually be beneficial. Not only can it help you secure a lower interest rate, but it may also help you roll the closing costs into the loan, reducing upfront costs. This will, of course, depend on the total amount of the closing costs vs. the price of the appraisal.