What Is A Home Equity Loan Appraisal?

Home equity loans are commonly used to finance home improvements or consolidate higher-interest debt, and can be a useful tool in helping to improve your overall financial situation. Most lenders will only give you a home equity loan up to a certain percentage of your home's value. To determine your home's value, the lender will require a home equity loan appraisal. This appraisal will set your home's value and determine the amount of your home equity loan.

Do You Need An Appraisal For A Home Equity Loan?

Yes, in nearly all cases you will need an appraisal for a home equity loan. A home equity loan appraisal allows a neutral third-party appraiser to set the value of your home. Once the lender has an expert opinion on your home's value, they can determine the maximum amount of money that they will lend you. This same appraisal process is typically necessary for a home equity line of credit (HELOC) and cash-out refinance.

Why Do Home Equity Loans Require An Appraisal?

Lenders use home appraisals to determine the value of a home which helps establish a home’s loan-to-value ratio (LTV). Lenders only allow homeowners to borrow against a certain percentage of a home’s available equity, and to clarify the loan amount, they need to know how much the home is worth. A home equity loan appraisal will determine that.

Here's an example of how an appraisal will help determine the amount of a home equity loan.

• LTV: Your LTV percentage is calculated as your total mortgage balance divided by the appraised value, represented as a percentage. For example, if your home is worth $400,000 and you have a remaining balance on your first mortgage of $250,000, your LTV is 62.5%

• Available equity: The available equity lenders allow borrowers to borrow against. In many cases, it may be 80% of your home's value.

In this scenario, 80% of your home's value of $400,000 is $320,000. Because there is a current first mortgage with a balance of $250,000 on the property, the maximum amount of a home equity loan you would be eligible for is $70,000 ($320,000 minus $250,000). Keep in mind that these values may differ depending on the lender you use, your own credit score and financial information and the area where you live.

What Types Of Appraisals Are Available For Home Equity Loans?

There are several different types of home appraisals that homeowners can use for home equity loans. Not all lenders will accept all types of appraisals. Here is a quick look at how different types of appraisals compare:

Full Appraisal

A full appraisal is the most common type of home equity loan appraisal and generally gives the most accurate valuation. In a full appraisal, the appraiser takes an all-encompassing interior and exterior inspection of the property. A full appraisal will include photos of the interior and exterior, as well as photos of the surrounding area. It will also include measurements of the home and an evaluation of the home's condition. This method allows homeowners to highlight any improvements they’ve made since buying the home.

Desktop Appraisal

As the name suggests, a desktop appraisal is done solely from the appraiser's desk or office, without actually physically visiting the home. Instead, the appraiser will use public records such as public tax records and information from the multiple listing service (MLS). A desktop appraisal may be an option for a home equity loan where the lender feels comfortable with the other information provided by the loan applicant.

Drive-by Appraisal

A drive-by appraisal, also known as an "exterior-only" appraisal, is one where the appraiser does not enter the inside of the home. This doesn't mean that the appraiser will simply drive by and take pictures — they will also usually do an exterior inspection and compare your home to similar homes nearby that have recently sold.

Hybrid Appraisal

A hybrid appraisal combines a number of different types of appraisals. With a hybrid appraisal, the appraiser will not visit the home directly —instead, a trained real estate professional will perform an interior and exterior inspection of the home and collect photos and other information for the appraiser. The appraiser will then use that information along with publicly available data to calculate the home's value.

Automated Valuation Model (AVM)

An automated valuation model (AVM) is a software-based tool that uses statistical analysis of publicly available information such as recent home sales and local property records to give an approximation of a home's value. While an AVM can be useful as a starting place for an appraisal, it's not always completely accurate. One of its biggest limitations is that an AVM is a data-driven model with no human review, which can lead to inaccuracies.

How Do You Prepare For A Home Equity Loan Appraisal?

If you have an appraisal scheduled for your home, you will want to do some preparations for your home appraisal.

Make Some Repairs

Some improvements or repairs, like repainting walls or replacing cracked light fixtures, can help increase a home’s perceived value. Appraisers are trained to notice defects and things that decrease a home's value. So, you'll want to make sure to take care of these repairs before your appraisal. Additionally, some larger repairs that may go beyond cosmetic normal wear and tear, such as exposed electrical or missing floorboards, may be required to be completed prior to closing on your loan.

Improve Curb Appeal

Improving a home’s curb appeal can help increase its perceived value during some types of appraisals. If you are having a full appraisal or a drive-by appraisal, the appraiser will be taking pictures and noticing how your home appears from the outside. Improving its curb appeal through landscaping, decoration or other exterior additions may help improve your home's appraised value.

Research Comps

Appraisers are not the only ones that can research comparable properties (comps) in the area. Homeowners often have access to the same publicly available home sales information. If an appraisal comes in lower than anticipated, comps may help if you decide to dispute the appraisal.

List Home Improvements

Providing a list of home improvements to the appraiser or lender can help increase the home’s perceived value during and after appraisal. This is especially true if you are getting a drive-by or desktop appraisal, where an appraiser may not see or be aware of any internal home improvements that you've made.

Is An Appraisal Always Required For Home Equity Loans?

A home equity loan appraisal is generally required, but there may be certain situations when an appraisal for a home equity loan may be waived. This might include if you have a previous relationship with the lender or if you have a home appraisal from within the last 6 months. Check with your lender to see whether a home appraisal is required in your specific situation.

Are There Other Ways To Get Financing With No Appraisal?

If you don't have sufficient equity to take out a home equity loan, there are other ways to borrow money that don’t require a home appraisal. Here are a few alternatives that you may want to consider:

Personal Loans

A personal loan does not require a home appraisal and is usually not secured by your home or any other collateral. Instead, whether you are approved for a personal loan will depend mostly on your credit score and other financial information. Keep in mind that you may not be able to borrow as much with a personal loan as you can with a home equity loan, and your interest rate will likely be higher.

Personal Lines Of Credit

A personal line of credit is another option to get financing without an appraisal. Like with a personal loan, a personal line of credit will generally come with lower borrowing limits and higher interest rates.

Credit Cards

Depending on how much financing you need and what you need it for, you may be able to use a credit card to borrow money. The amount that you can borrow on a credit card will be determined by your credit limit, and using your entire credit card limit may affect your credit score. Credit cards generally have a much higher interest rate, though you may be able to find one with a low introductory rate.

FHA Title 1 Home Improvement Loans

Some Federal Housing Administration (FHA) home improvement loans allow borrowers with limited home equity to borrow money for home improvements. According to HUD, these improvements must "substantially protect or improve the basic livability or utility of the property." Note that amounts over $7,500 must be secured by a mortgage on the property.

The Bottom Line

A home equity loan can be an attractive way to finance projects such as home improvements using the equity in your home. Because lenders typically limit the amount of a home equity loan to a certain percentage of the home's value, it is important to know what the home is worth. A home equity loan appraisal will set the home's value, which will in turn determine the maximum amount a lender will be willing to loan you.

If you're considering a home equity loan or want to get your finances in order, consider signing up for the Rocket Money^SM app today. You can check your credit and review your finances before applying for a home equity loan.