Much of our world is becoming automated. It should be no surprise that this is also true of the housing and mortgage industry. While some automation changes are feared, this change will be good for the mortgage lender and the mortgage seeker alike.

The Rules Have Changed

Fannie Mae and Freddie Mac have revised their rules for appraisals this past June. While it only affects first and second homes at the moment, it will likely go into other areas of borrowing in the near future.

What has changed? Fannie and Freddie are both accepting of AVMs, or Automated Valuation Models, for mortgages. During the housing crisis of 2008, too many homes were being overvalued by appraisers, which was a contributing factor to why the bubble burst. By using more AVMs, the appraisal process is less costly for everyone involved and more objective.

How does an AVM work?

AVMs use something called “appraisal analytics” to model the value of the home based on data on the region, tax assessment value, prices homes similar in the area, previous appraisals, and any information on improvements to the home, like adding a garage or a deck, that’s on record.

How do AVMs help mortgage borrowers?

The immediate benefit is there is no appraisal cost. Appraisals can average anywhere from $200-500. This also speeds up the home-buying process overall. What proponents of the new system like is that regardless of who inputs the data, the outcome is based on facts. So there’s a much lower risk of home prices being inflated during the mortgage process.

Is there a catch?

There’s often a drawback in removing a human element to a process. Appraisers actually do set foot in the home to check things out. AVMs don’t. So while it saves money and time, there’s also the risk of missing something key that could be wrong with the home in question. An algorithm can’t smell mold, for example, or notice if a support beam is weaker than it ought to be for its age. The data also takes a long period of time to compile. So the home’s valuation could be three or six months old, which could be significant or not, depending on housing market stability.

Is AVM right for me?

That answer could go either way. AVMs have been around for several years. Initially, some were concerned that homes were being either undervalued or hyper-inflated, but the data has remained consistent. Of course, there is the value of the human element being “hands on” in the appraisal. It’s best to have a conversation about the cost benefit of using an AVM with one of our loan counselors who can help explore the options with you.

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