Does a Home Equity Loan Require an Appraisal (2024)

If you’re applying for a home equity loan, almost all lenders will require an appraisal to determine the value of your home. Thus, a home equity loan does require an appraisal. The same is true for other types of home loans, including a cash-out refinance, rate and term refinance, and home equity line of credit.

There are different types of appraisals that can be done. Some will require a certified appraiser to physically inspect your home in person, while others may only require a computerized estimate of your home’s value (called an Automated Value Model, or AVM).

The type of appraisal required will be determined primarily by your lender, the loan terms you’re requesting, and the characteristics of your home. Read on as we’ll go through the details of how each appraisal works and what you can do if it ends up hurting your chances of getting a loan.

Does a Home Equity Loan Require an Appraisal (1)

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Why is an appraisal required for home equity loans?

An appraisal tells a lender what your home is currently worth. It will then use this information to determine the maximum loan amount it can lend. Most home equity lenders will only issue home loans up to a maximum of 80% to 90% of the value of a home, so you’ll need to have enough home equity to start the process.

This limit is set in place to limit the lender’s risk exposure. Home equity loans use the property as collateral, allowing the lender to foreclose on the property in the event you default on payments. In other words, if you miss enough payments, the lender can take possession of the property and resell it to recoup some of its losses. In a scenario where a lender must foreclose, it will still incur fees, which is why lenders rarely lend up to the full value of a property.

What are the different types of appraisals and how does each work?

A home equity loan appraisal can most commonly be either an automated valuation model (AVM), a driveby appraisal, or a full interior/exterior appraisal. However, other types of appraisals exist that combine characteristics from each of these.

Although all of these strive to accomplish the same goal of providing the most accurate indicator of value for a home, there will be some limitations as each type of appraisal considers different factors.

Automated Valuation Model (AVM)

An AVM searches public records to obtain as much information as possible about your home’s features and characteristics. It will then try to find similar homes that have also recently sold within your neighborhood. Here are some examples of residential real estate data an AVM can consider in determining what your home is worth:

  • Type of home (single family, condominium, townhome, multi-unit, manufactured home, etc.)
  • Gross living area
  • Number of bedrooms and bathrooms
  • Size of garage or carport
  • Location of homes recently sold in your neighborhood
  • Number of homes recently sold
  • Number of homes currently listed for sale in your neighborhood
  • Market trend analysis
  • Amount of homeowner’s association dues
  • Amenities (pool, tennis courts, on-site gym, etc.)
  • Special features (such as a guarded/gated community)

Drive-by appraisal

As the name suggests, this type of appraisal has a professional appraiser conduct a visual inspection of only the exterior of your home. It is also sometimes referred to as an exterior-only inspection.

It takes into consideration everything that an AVM does and more. Rather than relying solely on a computerized model, this type of appraisal adds the expertise of a certified appraiser to reach an opinion of value for your property. As a result, you’ll get a more accurate appraisal value.

Here are some examples of additional items that are taken into consideration that an AVM may not:

  • Location to amenities (entertainment, food, shopping, schools, etc.)
  • A greater level of accuracy on the number of homes recently sold
  • Number, type, and impact of distressed sales on home values
  • Proximity to negative external sources, such as a noisy road or power lines

Full interior/exterior appraisal

The most comprehensive type of appraisal done for a home equity loan is a full interior and exterior inspection of your property, sometimes referred to as a “full appraisal” for short. In addition to the items reviewed in an AVM and a drive-by appraisal, appraisers look at additional items such as:

  • External features, such as a beneficial view of the ocean
  • Functional layout of the home
  • Upgrades and renovations recently completed
  • Materials used in construction
  • Condition of paint, flooring, and interior walls
  • Condition of roof and exterior walls
  • Presence of any health/safety hazards
  • Impact of seller concessions on the final purchase price
  • Predominant type of financing and impact on home values

What if I do not agree with the appraisal?

Within several days of an appraisal inspection being completed, you’ll be given a report with the appraiser’s opinion of value and how they reached that figure. If you don’t agree with an appraiser’s evaluation of your home, you do have the ability to provide a rebuttal to have your home’s value reconsidered. Here are some of the steps you can take:

  • Verify the accuracy of the appraisal: While you may not be a certified appraiser, you can double-check the accuracy of the information the appraiser used for your home. This can include the size of your home, room count, description of appliances, and other features.
  • Request a more thorough appraisal to be completed: Appraisals have limitations and a more thorough appraisal, while it may come at an added cost, can consider items that can have a positive impact on your home’s valuation.
  • Provide the appraiser with better comparable properties: The value of your home is largely based on the comparable properties (comps) the appraiser has selected, so you’ll need to find better comps. As a general rule of thumb, the best comps are homes that have sold within 1 mile of your home, have a close of escrow date within the past 1 to 3 months, and have similar characteristics to your home (such as living area, bedroom, and bathroom count).
  • Pay for another appraisal: Some lenders will allow you to pay for a second appraisal of the same type. You’ll usually have to pay for this, however, and there is no guarantee that a second appraisal will yield a higher value.

Frequently Asked Questions (FAQs)

How should I prepare for an appraisal?

In short, you should prepare for an appraisal by improving its curb appeal. You can finish up a home improvement project, tidy up the home, mow the lawn, and finish up any needed home repairs. This can also reduce the likelihood of a lender having concerns over potential health or safety hazards in your home. For more details, you can also read this guide on how to prepare for an appraisal.

How much does an appraisal cost?

An appraisal is a small part of the closing costs involved with getting a home equity loan. Appraisals can cost anywhere from $50 to as much as $800 or more. AVMs are the cheapest, costing lenders between $50 and $99. Driveby appraisals typically range from $100 to $250 depending on the complexity of the assignment. Finally, full interior/exterior appraisals can add anywhere from around $450 to your closing costs for a standard home, to as much as $800 and up for a larger or more complex property.And remember, refinance appraisals cost about the same as well.

What other options do I have if I can’t get a home equity loan because of an appraisal?

If home equity loans are not an option for you because of an appraisal issue, you can consider other financing options that do not use your home as collateral. Some examples can include a personal loan, credit card, and personal line of credit.

Is it possible to get a home equity loan without an appraisal?

Most home equity loans require a brand new appraisal, but if you’ve had another lender do an appraisal on your home within the last 180 days, you can ask your new lender if they can accept that appraisal report. Most lenders consider appraisals to be valid for 180 days, especially for home equity loans, but this can vary from lender to lender.

A home equity loan does require an appraisal

If you need to get a home equity loan, your lender will most likely have your home appraised to verify its condition and current value. Depending on the type of appraisal conducted, there are also things you can do beforehand to improve the likelihood that it will work in your favor. If you’re not able to get approved because of an appraisal, you still have other options, such as personal loans and other types of financing.

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Disclaimer:The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Does a Home Equity Loan Require an Appraisal (2024)

FAQs

Does a Home Equity Loan Require an Appraisal? ›

Yes, your home equity loan will typically require an appraisal to protect your mortgage lender. Because you're using your home as collateral, a home equity loan is considered a secured loan.

Is appraisal needed for a home equity loan? ›

Lenders require an appraisal for home equity loans to protect themselves from the risk of default. If a borrower can't make monthly payments over the long-term, the lender wants to know it can recoup the cost of the loan. An accurate appraisal protects borrowers too.

Can appraisal be waived for a home equity loan? ›

Eligibility for No-Appraisal Home Equity Loans

While traditional loans typically require an appraisal, some lenders may waive this requirement, especially if you have a substantial amount of equity in your home.

What disqualifies you from getting a home equity loan? ›

High debt levels

In addition to your credit score, lenders evaluate your debt-to-income (DTI) ratio when applying for a home equity loan. If you already have a lot of outstanding debt compared to your income level, taking on a new monthly home equity loan payment may be too much based on the lender's criteria.

How to get home equity loan without appraisal? ›

Tips on how to get a home equity loan without an appraisal
  1. Look for lenders that consider automated valuation models (AVMs) or desktop appraisals. ...
  2. Ensure that you meet the lender's qualification requirements for loan approval. ...
  3. Provide full documentation of income, credit history and property details.
Jun 5, 2024

How to avoid an appraisal for a HELOC? ›

Some lenders may offer HELOCs without requiring a full appraisal, making them a more accessible option for certain homeowners. Cash-out refinancing: Cash-out refinancing involves replacing your existing mortgage with a new one for a higher amount than you currently owe. The excess funds can be used as needed.

What happens if appraisal is higher than offer equity? ›

If A House Is Appraised Higher Than The Purchase Price

It simply means that you've agreed to pay the seller less than the home's market value. Your mortgage amount does not change because the selling price will not increase to meet the appraisal value.

Why would I not qualify for a home equity loan? ›

Having a bankruptcy or foreclosure on your short- to mid-term credit history will likely make it difficult to qualify for all types of loans, including HELOCs. These marks against your creditworthiness are not permanent, but they also don't vanish overnight.

How hard is it to get a home equity loan? ›

It is fairly easy to get a home equity loan, as long as you meet a lender's eligibility requirements. Credit unions, banks, and online lenders all have different loan requirements for borrowers, including a minimum credit score, a sufficient debt-to-income (DTI) ratio, and home equity of at least 20%.

What is a disadvantage of a home equity loan? ›

Home Equity Loan Disadvantages

Higher Interest Rate Than a HELOC: Home equity loans tend to have a higher interest rate than home equity lines of credit, so you may pay more interest over the life of the loan. Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score.

Can a loan be approved without an appraisal? ›

Appraisal Waivers or “Property Inspection Waivers (PIWs)” allow borrowers and lenders to skip the home appraisal process entirely in California when buying a home. There are, however, very strict criteria that must be met before a PIW is granted.

How do banks determine home value for home equity loans? ›

Home equity lenders rely on a home's appraised value — based on a professional appraiser's assessment — to determine your equity level and how much you can borrow. The fair market value of your home simply refers to what a homebuyer would likely pay for the property today.

Can you write yourself a check from a home equity loan? ›

Can I write a HELOC check to myself? Absolutely, you can indeed write a HELOC check to yourself. In fact, it's a common practice among homeowners leveraging their home equity.

What is the process for a home equity loan? ›

The process works a lot like any other mortgage: You'll compare offers, choose a lender, apply, and provide documents like pay stubs and bank statements. The lender will review your application and order an appraisal. Once you're approved, you'll sign closing papers, pay the upfront fees, and receive your cash.

Is equity based on appraised value? ›

You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. This includes your primary mortgage as well as any home equity loans or unpaid balances on home equity lines of credit.

Does a home equity loan hurt your credit? ›

When you take out a loan, such as a home equity loan, it shows up as a new credit account on your credit report. New credit affects 10% of your FICO credit score, and a new loan can cause your score to decrease.

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