Automated Underwriting & Appraisal Waivers

You're probably aware that mortgage lenders and investors utilize automated underwriting systems (AUS). Each enterprise has their own proprietary system. Fannie Mae's system is Desktop Underwriter (DU). Freddie Mac has Loan Product Advisor (LP). FHA and USDA also have their own systems.

The AUS analyzes a borrower's loan application and credit report, compares it to the mortgage program selected, and determines whether the borrower qualifies for the loan. AUSes are intended to remove the subjectivity of underwriting. A human still has to verify the information entered into the AUS. And the AUS results are only as accurate as the information entered. If the loan officer calculates income incorrectly, their results could be inaccurate.

A few years ago, Fannie and Freddie also introduced automated underwriting for appraisals. Fannie's system is called Collateral Underwriter (CU) and Freddie's is Loan Collateral Advisor. When an appraisal is received, it's submitted to one of these web-based systems. The system compares the appraisal report to historical data, public records, and comparable sales to deliver an estimate of valuation risk and alert lenders to potential red flags.

Both systems deliver an appraisal score. A low score indicates the system agrees with the appraiser's value. A high score means there is a risk that the appraiser's value is too high.

What happens if Collateral Underwriter or Loan Collateral Advisor return a high risk score? A high score doesn't mean the loan will be declined. The lender simply has a little more homework. Usually it results in a "desk review" of the appraisal. That means a human (usually an appraiser or property expert affiliated with the lender) will review the appraisal report to see what's going on.

We can usually predict when CU or LCA will return a high score. It's really common for properties that have recently been renovated or remodeled. The computer knows that property sold a year ago for $300,000. Now it's being re-sold for $450,000. The computer doesn't know that the interior was completely gutted and remodeled. But the desk review will reveal the remodel, the appraisal report will be given the green light, and the transaction can proceed.

I've never had a desk review of an appraisal result in the transaction going sideways. It just adds a day or so to the process and costs the customer an additional $250 or so.

The great thing about automated underwriting systems for appraisals is that the system "stores" the appraisal information and makes it more likely that a future transaction for the same property will receive an appraisal waiver. If Fannie or Freddie already have an appraisal (with an acceptable score) in their system, it's likely that the next person to purchase that home won't need an appraisal at all.

How can you increase your chances of obtaining this highly coveted waiver?

• Work with a lender who can choose between Fannie Mae or Freddie Mac. Some lenders only use one or the other. A previous Fannie Mae appraisal won't work for a new Freddie Mac loan and vice versa.
• Transactions must be for conventional loans. FHA, VA, and USDA transactions will not receive appraisal waivers.
• The transaction must be for a primary residence or second home. Investment properties will not receive appraisal waivers (unless it's for a refinance).
• Properties must be single family, 1-unit residences or condos. 2-4 units, manufactured homes, properties on leased land, non-arm's length transactions, and REO properties (foreclosures) are ineligible.

Automated underwriting for appraisals is still a fairly new concept. Loan Collateral Advisor was introduced in late 2016 with Fannie Mae's product following in late 2017. As properties that were purchased after 2016/2017 are re-sold, I think we will see many more appraisal waivers in the future. And with just one (!) remaining appraiser in Jefferson County, that is a beautiful thing!