Home equity loan appraisal: What homeowners should know

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A home equity loan is a powerful tool you can use to cover home renovations, consolidate your high-interest debts – such as credit card balances – or pay for other major expenses. It allows you to tap into the equity you have in your home and put it to work for you.

Considered a second mortgage, a home equity loan uses your equity as collateral. As such, it allows you to draw money out without using a cash-out refinance of your existing mortgage.

Knowing what to expect during a home equity loan appraisal can help you estimate your borrowing power and apply confidently. Let’s explore how home equity loans work and how they can be used.

Key takeaways:

• Appraisals are not always required. If you meet specific lender qualifications, an automated valuation model (AVM) may be used instead of an appraisal to verify your property's value.
• A valuation confirms your borrowing limits. Whether your lender uses an appraisal or an AVM, this step allows them to calculate the amount of equity you can tap into.
• Preparation goes a long way. If you need an in-person appraisal, taking the time to tackle small repairs, boost your curb appeal, and list recent upgrades can help you get the best valuation possible.

Does a home equity loan require an appraisal?

No, a home equity loan does not always require an appraisal. While it's true that a valuation of the property is a necessary step, the method a lender uses to establish your home's value can vary widely based on your financial profile.

If you meet specific lender qualifications, an automated valuation model (AVM) may be used instead of a traditional appraisal. An AVM relies on algorithms and local real estate data to determine value.

However, if your loan doesn't qualify for an AVM, your home equity loan will typically require a full appraisal. Because you’re using your home as collateral, a home equity loan is considered a secured loan. If you borrow more than the value of the home, that will leave part of the loan unsecured, which puts the lender at financial risk should you default.

Rocket Mortgage requires a full appraisal for the Home Equity Loans it offers when a loan doesn't qualify for an AVM.^1,2 Other lenders may take different approaches, ranging from full physical inspections to desktop and drive-by appraisals.

Do HELOCs require appraisals?

If you're opting for a revolving line of credit instead of a lump sum, you might wonder if a home equity line of credit (HELOC) requires an appraisal. Similar to home equity loans, HELOCs require a valuation to ensure you have sufficient equity, but the type of appraisal required can vary based on your financial profile and the lender's guidelines.

Rocket Mortgage doesn’t offer HELOCs at this time.

Why do home equity loans require an appraisal?

Whether using an appraisal or an alternative like an AVM, the valuation is used to confirm the worth of the home and establish borrowing limits based on existing equity.

Home value, also called appraised value, is a professional opinion on how much the property is worth on the fair market if it were being sold at the time of the valuation. This opinion is typically given by a state-licensed home appraiser, who operates independently from the influence of the lender or homeowner.

Home equity is the difference between your home value and your remaining mortgage balance. To cut down on risk, lenders require you to leave a certain amount of equity in your home. They measure this using a metric called loan-to-value ratio (LTV), which is the inverse of equity. For example, if you have 20% equity in your home, it means your LTV is 80%.

Loan-to-value formula

Rocket Mortgage allows you to borrow up to 90% of your existing home value between your primary mortgage and a Home Equity Loan if you qualify. Here’s the formula for calculating how much you could borrow.

Loan amount = Home value × 0.90 – Primary mortgage balance

Let’s look at an example with real numbers. Say you have $200,000 remaining on a mortgage for a home worth $400,000. Using the formula, you could borrow up to $160,000

$160,000 = ($400,000 × 0.90) – $200,000

Combined loan-to-value ratio

When a lender assesses your application for a second mortgage, they examine your combined loan-to-value ratio (CLTV). This metric represents the sum of your primary mortgage and your new home equity loan divided by the home's appraised value.

Lenders limit how much you can borrow against your home to protect themselves from market fluctuations. They typically enforce a maximum CLTV limit of 80% – 90% of your home's value, depending heavily on your credit score and financial standing.

What happens during a home equity loan appraisal?

If your loan doesn't qualify for an AVM, an in-person physical assessment will be ordered. The appraisal process for a home equity loan is systematic. An independent appraiser schedules a visit, conducts a property review, performs a condition check, and then completes a comparable sales review.

What appraisers look for

In addition to determining your home’s value, an appraiser assesses its condition. If you default, a lender would have a hard time getting value for the property if there were things seriously wrong with the house.

There are several factors appraisers look at, but most of these are basic things, like checking the electrical code and making sure the water works. The roof has to be in good condition. It comes down to whether the property is safe, sound, and move-in ready.

Because the main focus is safety, the appraiser doesn’t go through your home with a fine-tooth comb, but major red flags relating to structural soundness and a healthy living environment will be pointed out.

Appraisers also look closely at comparable sales to help set your home's value. When selecting comparables, an appraiser searches for homes in your area that match your property as closely as possible.

They want to see homes with similar square footage, identical bedroom and bathroom counts, comparable lot sizes, and similar features. Importantly, these comps should have sold recently to ensure the appraisal reflects the current market.

How long a home equity loan appraisal takes

The appraisal timeline usually moves relatively fast. The physical visit to your home takes 30 minutes – 2 hours, depending on the size and complexity of your property. Once the visit is complete, the appraiser heads back to their office to run comps and draft the report. Receiving the final appraisal document generally takes 1 – 3 weeks.

How much does a home equity loan appraisal cost?

A common concern for homeowners is the upfront expense of a valuation. A home equity loan appraisal typically ranges from $400 – $1,000.

You’ll generally pay out of pocket for the appraisal, but it’s often paid at closing or through a deposit that later goes toward settlement costs. Keep in mind that how much a home equity appraisal costs depends heavily on your home's size and location. Larger homes or properties located in rural areas where the appraiser has to travel long distances generally incur higher fees.

Types of home appraisals for home equity loans

While home appraisals are straightforward, there are several different kinds. You should familiarize yourself with each so you know exactly what to expect from your lender.

Full-home appraisal

This is the most common type of home appraisal. Like most lenders, Rocket Mortgage requires a full-home appraisal for Home Equity Loans when the loan does not qualify for an AVM.

In a full-home appraisal, the appraiser will walk through the home with the homeowner to evaluate its features and condition. The exterior is also inspected.

Once your home has been evaluated, the appraiser will visually assess the condition of major systems and note any obvious deficiencies, but they are not conducting a comprehensive home inspection.

Drive-by home appraisal

This is an external-only appraisal in which the appraiser inspects only the exterior of the home. A drive-by appraisal uses photos, online records, and an outside visual inspection to determine market value.

The main attributes of a drive-by appraisal are that it skips a physical walk-through of the property and is more affordable. However, if you’ve made significant upgrades to your home’s interior, these may not be factored in.

While Rocket Mortgage doesn’t do drive-by appraisals, we do have exterior inspections in conjunction with AVMs to verify property condition.

Desktop home appraisal

In a desktop appraisal, no one visits your home. The data is compiled based on public records and other sources, including home listing websites and proprietary information.

Again, this is very convenient. However, this evaluation is only as good as the data backing it up. If public records haven’t been updated to reflect renovations, it could lead to an inaccurate home value.

Please note that Rocket Mortgage does not offer desktop appraisals.

Hybrid home appraisal

In a hybrid appraisal, a third party performs the inspection part of the appraisal – collecting basic data, taking pictures, and reporting on the condition of the home – and forwards that information to a licensed appraiser, who writes the report from their desk.

This type of appraisal is commonly used in areas where there’s a shortage of qualified appraisers. As a result of increased efficiency, the cost of a hybrid appraisal may be cheaper.

Automated valuation model

Like so many tasks and services in modern life, the automated valuation model takes the human out of the process. No appraiser visits your home. Instead, using key information, your home is compared with recent sales of similar properties in the area to come up with a valuation.

This is designed to create an unbiased estimate. Because an AVM is a data-driven estimate, it's not a true appraisal. Recent upgrades and improvements to your home may not be considered, as it relies heavily on the model’s pre-programmed assumptions.

Appraisal waivers

Some lenders offer appraisal waivers for well-qualified borrowers. If a lender waives an appraisal, they’re likely relying either on a previously established home value from a recent transaction or using an AVM. Borrowers with excellent credit histories and low LTV ratios are the most likely candidates to receive an appraisal waiver.

How should you prepare for your home equity loan appraisal?

Because the appraisal of your home has a substantial impact on your loan, it’s important to prepare. Here are a few ways to ensure your home is appraised fairly.

Gather documents and list improvements

Create a list of all upgrades and home improvements, including their costs and dates of completion. Did you remodel the kitchen or install a new roof? Include anything you think could positively impact the value. Appraisers will discard anything that is irrelevant, but having documentation available ensures they don't miss your hard work.

Make every area accessible

Appraisers can’t base their valuation on the cleanliness of your home, but make sure they can easily get to all parts of your home for their assessment. Unlock doors to the attic, basement, and utility rooms. Ensure areas around the water heater, electrical panel, and HVAC system are completely clear of clutter.

Tackle small repairs and curb appeal

Check the HVAC system and other systems of the home before the appraisal, since this will be on the appraiser’s checklist. Address any potentially hazardous issues like mold or exposed wiring.

Appraisers also take the condition and aesthetics of your home’s exterior seriously. This is a big factor in its value. Spruce up the exterior and tackle small repairs like leaky faucets, scuffed baseboards, or missing cabinet knobs to make a good impression.

What if your home equity loan appraisal comes in low?

Receiving a low appraisal for a home equity loan is incredibly frustrating. Because your borrowing limit is tied directly to your home's value, a low appraisal can significantly reduce the amount of cash you're able to access.

Why appraisals can come in low

Appraisals can come in lower than expected for several reasons. Often, it's due to a cooling local real estate market, meaning recent comparable sales have closed for less. It can also happen if the appraiser overlooked unique features, or if they were unfamiliar with specific neighborhood trends that make your home desirable.

Your options after a low appraisal

If you disagree with the appraiser's final valuation, you aren't completely out of luck. You can submit an appeal, also known as a reconsideration of value (ROV), by providing your lender with new, highly relevant comps that the appraiser may have missed.

Alternatively, you can ask your lender if you can request a second appraisal, though you may have to pay for the new report yourself.

Other options for no-appraisal financing

If you don't have the required equity or simply don't want to use your home as collateral, there are other forms of financing that don’t require a home appraisal. Each has its own set of benefits and drawbacks.

Personal loan

There’s usually no collateral associated with a personal loan. Our partners at Rocket Loans can help you see your options, with a borrowing range of $2,000 – $75,000.

Interest rates on these are higher than for primary mortgages or home equity loans, but the closing costs can also make more sense on personal loans, depending on your situation. Additionally, because there’s no need for an appraisal or title work, the funding process can happen much more quickly.

Personal line of credit

A personal line of credit works like a home equity line of credit, except your home is not used as collateral. With a personal line of credit, you’re approved for a certain amount and can draw out money as needed for whatever you like. You only accrue and pay interest on the amount you use.

Credit card

For small projects, you may be able to fund them with a credit card. However, you should be prepared to pay the balance quickly to avoid high interest charges. Additionally, credit card limits could severely restrict how much you can spend compared to a home equity loan.

Contractor financing

Certain contractors may be willing to extend financing to you on their own terms. Read through everything thoroughly and make sure that the terms make financial sense for you. Keep an eye out for high interest rates or short repayment windows.

FHA Title I Home Improvement Loan

The FHA Title I Home Improvement Loan is intended to offer home improvement funds to those who might not otherwise qualify given limited home equity.³ The loan limit varies depending on the type of property you have, but it can be as much as $25,000 for a one-unit home. If the loan is less than $7,500, you don’t need any property securing it.

FAQ

Here are answers to some of the most common questions homeowners ask about the appraisal process before taking the next step.

What are the red flags for home appraisals?

Major home appraisal red flags include severe structural damage, foundation cracks, a sagging roof, active water leaks, mold, and pest infestations. Code violations, such as outdated electrical panels or missing handrails, also will damage the valuation and flag the home as unsafe.

Can you get a free home equity loan appraisal?

While a traditional, in-person appraisal usually comes with an out-of-pocket cost, you can get a free valuation if you qualify for an alternative method. For example, AVMs at Rocket Mortgage are completely free for borrowers.

Does cleanliness affect a home equity appraisal?

Dust and a few unwashed dishes won't lower your home's value. Appraisers are trained to look past everyday messes. However, excessive clutter that blocks access to walls, floors, or major systems can make it impossible for the appraiser to fully grade the condition of your home. A tidy space means your home's features are visible.

What home equity loan appraisal questions should you ask your lender?

Before moving forward, be sure to ask your lender:

• What type of appraisal is required?
• Do I meet the qualifications for an AVM or an appraisal waiver?
• Who pays the appraisal fee, and when is it due?

The bottom line: Your valuation unlocks your home's equity

A home equity loan can help you accomplish many goals, from upgrading your home to consolidating debt or going on a family vacation. Whether your lender requires an appraisal or uses an alternative like an AVM, the valuation is used to confirm the worth of the home and establish borrowing limits based on existing equity.

To ensure your home is appraised at its full market value, make sure you show it in its best light. Clean up your property, tackle small repairs, test all systems, spruce up the exterior, and make sure any potential hazards are removed.

When you’re ready to put the equity of your home to work for you, apply for a home equity loan with Rocket Mortgage.

¹Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

² Automated valuation model (AVM) is software that uses existing property details to generate a property’s estimated value. AVM appraisals are valid only for Home Equity Loan products. Not eligible for loan amounts greater than $400,000. When eligible for an AVM, the valuation will automatically be applied. Traditional appraisals available by request. Not eligible for loans already in process. AVMs are not available in all states or on higher-priced mortgage loans that don't meet Qualified Mortgage (QM) requirements. Additional restrictions/exclusions may apply. This is not a commitment to lend.

³ Rocket Mortgage is not acting on behalf of FHA or HUD.

Rocket Mortgage and Rocket Loans are trademarks or service marks of Rocket Mortgage LLC or its affiliates.