Always Required Except When It’s Not

They say there is an exception to every rule, and the Appraisal rules are no exception.  Because appraisals can take weeks to complete, can delay closings, and are often expensive, it is important for the prudent lender to be familiar with the regulatory exceptions from the appraisal requirements in order to save borrowers time and money.

The appraisal regulations enumerate fourteen different exceptions. It is key to note at the outset that for some of these exceptions, even though an appraisal is not required, the bank still needs to obtain an evaluation.  While it’s beneficial to know all of the exceptions, we are questioned about a certain few exceptions much more frequently than the others.  The popular exceptions include transaction thresholds, subsequent transactions, and abundance of caution.

The two common transaction value thresholds are $400,000 for residential real estate transactions and $500,000 for commercial real estate transactions.  The key distinction between these two types of transactions is whether or not they are secured by a single 1-to-4 family residential property.  If the transaction is secured by only a single 1-to-4 family residential property, it is a residential real estate transaction, and if it is not, then it is a commercial real estate transaction.

For example, if you have a real estate-related transaction secured by multiple 1-4 family residential properties, you have a commercial real estate transaction on your hands. Even though a transaction may fall under a threshold, the Bank is still required to obtain an evaluation under this exception.  

For the subsequent transaction exception, the transaction must meet one of two circumstances:

  1. if the transaction involves the advancement of new money, it is required that there has been no obvious and material changes in the market conditions or physical aspects of the property that would threaten the bank’s collateral protection, or
  2. the transaction does not include the advancement of new money other than reasonable closing costs.

If relying on this exception, an evaluation is required, however an existing appraisal can satisfy this requirement provided that the Bank revalidates the appraisal.

The abundance of caution exception has a very limited application and should be relied on by banks carefully. Generally, the abundance of caution exception only applies when the bank did not consider or look towards the market value of the property in making the credit determination whatsoever. For example, a business loan must be well supported by the borrower's cash flow or collateral other than real property and requires verification of and documentation the primary and secondary repayment sources.

Because of safety and soundness concerns, it’s not always advisable to rely on an exception, and there are instances in which it would be prudent to require an appraisal even though the appraisal rules do not ask for one.  However, in appropriate circumstances the appraisal exceptions provide a way for the bank to be more competitive by saving borrowers both time and money.

We have a very helpful appraisal toolkit, which includes policies, checklists, flowcharts and more: