Do You Need An Appraisal For A Home Equity Loan?

Whether you’re eyeing a home renovation, consolidating debt, or starting a business, borrowing against your home equity can be a viable option. But before you get ready to cash in, there is one step you will likely need to take: getting your home appraised.

In this guide, we will dive into whether you need an appraisal when applying for a home equity loan or HELOC, how the process works, the types of appraisals and how much they cost.

Do home equity loans require an appraisal?

The short answer is typically yes. Before lenders approve you for a HELOC or home equity loan, they usually require an appraisal, which is an assessment of your home’s worth – what it would fetch if sold on the current housing market.

By determining your home’s value, the appraisal will help determine the amount of equity you have, and the amount the lender will allow you to borrow against. Typically, you won’t be able to access all your available equity, as most lenders cap that amount at 80 to 85 percent of your ownership stake.

Why do HELOCs and home equity loans require an appraisal?

Home appraisals confirm a property’s current market value. Everything about the process of getting HELOCs and home equity loans stems from that value.

You may recall that, when you bought your home, your mortgage lender ordered an appraisal to determine what the property was worth, and how big a sum you could borrow for it. The aim here is similar. “Home equity products are secured against the borrower’s home and lenders want to ensure sufficient equity even in the case of home price fluctuations,” says Shoji Ueki, chief growth officer at Point, a home equity investment firm based in California. “If the market changes or something unexpected happens, we want to be sure the value of the home still supports the investment amount. It helps us manage risk and ensures the borrower isn’t overleveraging their home.”

A home’s valuation is also a “key driver in the pricing” of the loan, explains Kiran Kuar, head of credit at Figure, a North Carolina-based HELOC lender. Lenders look at your loan-to-value ratio (LTV), which is the amount of money you’re borrowing divided by the value of your property. If that percentage is higher than the lender’s LTV threshold, they may reduce your loan amount, or even deny your application altogether. If your LTV is in the acceptable range, but close to the max, they may approve the loan, but with a higher interest rate.

When you might not need a full appraisal

Despite its importance, a new appraisal for a HELOC or home equity loan is not an absolute requirement in all cases.

If you happen to have gotten a full home appraisal shortly before starting your HELOC application – while applying for another loan, say – your lender might accept it. “If a prior appraisal is available and meets current investor guidelines, it may be reused,” says Vishal Garg, CEO of Better, a HELOC lender headquartered in New York. Generally, that appraisal should be relatively recent, no more than six months old (since the whole point is to determine the home’s current market value).

Increasingly, home equity lenders are also waiving the traditional in-person appraisal for an automated valuation model (AVM). An AVM is a computer-based algorithm that uses publicly available data to estimate a home’s value, without human input. Obviously less time-consuming and costly, AVMs are often used for borrowers with strong credit scores (in the mid-700s to 800s) looking for a small loan relative to the value of their home or to the amount of their equity (since they’ve paid off a significant portion of their existing mortgage).

The AVM “is a very frictionless, zero-time method to value someone’s home,” says Kuar. “The borrower does not have to wait. It’s instant. You can present a decision fairly quickly to the consumer.”

Kuar acknowledges that AVMs may be limited by the data they have, though. They “assume that the house is in average condition and in a similar condition to other properties in the immediate neighborhood,” she says. That means it won’t capture any extensive value-enhancing upgrades or renovations you’ve made to your property (of course, it won’t indicate if the place is in disrepair, either).

Types of home appraisals for HELOCs and home equity loans

Once you apply for your home equity loan or HELOC, your lender will let you know if an appraisal is required and what type will be used. Here’s a snapshot of the different types of appraisals that may be used, what they entail and other criteria:

Learn more: Home appraisal vs. home inspection: What is the difference?

The home equity loan appraisal process

The appraisal process for a HELOC or home equity loan varies depending on the lender, but the purpose is the same: to determine the market of your home. Here’s a step-by-step run-through of the process from beginning to end.

Application is completed

Begin the HELOC or home equity loan application by providing details about your income, debts, property and financial history. After the loan application is submitted, the lender will evaluate your financial profile, including your credit score and existing mortgage balance.

Appraisal is ordered

If you meet the initial criteria, the lender orders an appraisal to determine your home’s market value. The type of appraisal (full, drive-by, desktop, or AVM) depends on the lender’s policies and loan amount. If an appraisal fee applies, the borrower usually pays for it, while the lender chooses who performs it. If an in-person appraisal is required, you will need to schedule a time for the appraiser to visit your home.

Report is generated

The findings of the appraisal are compiled in a report, including the estimated value of the property and supporting documentation such as recent comps and then submitted to the lender.

Lender reviews application

The lender uses the appraisal to calculate your home equity and determine how much they’re willing to lend. How quickly you receive a decision will vary depending on the lender and the type of appraisal conducted.

Loan decision

Based on the appraisal and your financial profile, the lender finalizes their offer. The findings of the appraisal may impact your loan terms or approval. You may also be asked for more documentation or offered a reduced loan amount.

After you see the results of your appraisal, don’t be surprised if the value of your home is vastly different from the estimate given by a real estate listings site or calculator

“That number published online is a very rough estimate,” says Jennifer Wentworth, owner and certified residential appraiser at MLS Appraising, an appraisal company based in Denver. “The actual value can vary quite a lot from that. It can be less and it can be more, but it doesn’t mean that it’s a bad appraisal or that there’s a problem with the appraisal.

It’s just what happens when “we’re actually looking at the specifics for a home in the actual market.”

FAQ

• Can you get a home equity loan or HELOC without an appraisal?
  

  You might be able to get a home equity loan or HELOC without a full appraisal, if your lender uses an automated valuation model, a desktop valuation or a drive-by appraisal to value your home (or some sort of combination). However, lenders require some way to confirm your home’s current market value before approving your loan.

• How should you prepare for a home equity appraisal?
  

  If your lender ordered an in-person appraisal, make sure your home is clean and well-maintained. Complete any minor repairs and gather information on recent improvements or upgrades you’ve made. It also helps to know the sale prices of similar homes in your neighborhood to give the appraiser some context.