Home Equity Loan Appraisal: What You Need To Know

If you prefer not to touch the rate on your primary mortgage, a home equity loan could be an alternative to turn your existing home value into cash to support your financial and home improvement goals. Like a cash-out refinance, your home serves as collateral and gets evaluated for condition and worth. Let’s touch on the ins and outs of a home equity loan appraisal and whether one is necessary.

Does Your Home Equity Loan Require An Appraisal?

Your home equity loan will typically require a valuation to protect your mortgage lender. Because you’re using your home as collateral, a home equity loan is considered a secured loan. If you borrow more than the amount of equity – or ownership – you have in your home, that would leave part of the loan unsecured, which puts the lender at financial risk should you default.

Rocket Mortgage® allows for certain eligible transactions to go through an automated valuation model (AVM).¹ Other times, we require a full appraisal for the Home Equity Loans we offer.² Other lenders may take different approaches and we’ll discuss the strengths and weaknesses of these a bit later on.

Why Do Home Equity Loans Require An Appraisal?

For lenders, an appraisal serves two purposes: It helps establish both the home value and condition of the property.

Home value, also referred to as appraised value, is an opinion on how much the property would be worth on the fair market if it was being sold at the time of the valuation. This opinion is typically given by a professional home appraiser who operates independently from the influence of the lender or homeowner.

Having an accurate property value is important because it helps determine how much home equity you have. Home equity is the difference between your home value and your remaining mortgage balance.

You can’t borrow the full amount of your existing equity between a primary mortgage and a home equity loan. To cut down on risk, lenders require you to leave a certain amount of equity in your home,, which lenders measure using a metric called loan-to-value ratio (LTV). LTV is the inverse of equity. So if you have 20% equity in your home, it means your LTV is 80%.

Rocket Mortgage allows you to borrow up to 90% of your existing home equity 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 × 0.9 - Primary Mortgage Balance

Let’s say you have $200,000 remaining on a mortgage for a home worth $400,000. You could borrow up to $160,000 ($400,000 × 0.9 - $200,000).

Beyond determining the home value, an appraiser also has to determine the condition of the property. In the event that 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 pretty basic things like checking electrical code and making sure the water works. The roof has to be in good condition. It comes down to whether the property is move-in ready.

Types Of Appraisals For Home Equity Loans

There are several ways lenders go about getting an accurate home value. Let’s look at the common types of appraisals used for home equity loans.

Full Appraisal

When people think of a home appraisal, they most commonly think of a full appraisal. Although there are other approaches to getting at home value, this is the technique most often used for home equity loans.

In a full 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 goes back and looks for comparable properties that have been sold in the last several months. Three-bedroom ranches are compared with other three-bedroom ranches.

Finally, the appraiser also makes sure that all major systems are working within the house such as electrical, water and HVAC to make an evaluation of its condition.

Automated Valuation Model (AVM)

An automated valuation model (AVM) limits the human touch to where it’s most necessary. The idea behind in AVM is that it takes information it knows about the features of your home and compares it against other homes that have sold recently with those features. It’s intended to give an unbiased value opinion.

The algorithm takes into account information about your property as well as similar homes in the local real estate market and your neighborhood to come up with a value. This saves clients both in terms of time and dollars. There’s also less failure to close based on a low appraisal because everyone knows the value upfront.

This does have a couple of weaknesses. The first being that any model is only as good as the data being fed into it. If you’ve made recent upgrades, the model may not be taking those into account right away. Secondly, all statistical models are based on assumptions. The things the model does and doesn’t account for are going to affect the value it reports back.

Drive-By Appraisal

A drive-by appraisal, also referred to as an “exterior-only appraisal,” involves the appraiser checking out just the outside of the home. The rest is filled in by public records and other information that an appraiser may have access to, such as online listing photos and information from special services.

The upside to a drive-by appraisal is that it’s convenient. The homeowner doesn’t even need to be there. It may also be cheaper because there’s less work involved. The downside is if you’ve done recent upgrades to your interior, the appraiser won’t see or evaluate those, so it may be less accurate than it could be.

In the event that you receive a property valuation via AVM, Rocket Mortgage will have someone do an exterior-only appraisal to verify the structural condition of the property.

Hybrid Appraisal

In a hybrid appraisal, someone 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 an appraiser who writes the report from their desk.

This type of appraisal could be used in areas where there are a shortage of qualified appraisers and they have to travel long distances. As a result of increased efficiency, the cost of a hybrid appraisal may be cheaper.

Desktop Appraisal

In a desktop appraisal, no one visits your home. The data for the appraisal is compiled based on public records and other sources including home listing websites and proprietary information. Again, this is very convenient. On the other hand, this evaluation is only as good as the data backing it up. If this hasn’t been updated recently, it could lead to an inaccurate home value.

How Should You Prepare For Your Home Equity Loan Appraisal?

What needs to be done before an appraisal depends on the type of valuation being done. If it’s an AVM, kick your feet up because there’s nothing to get ready. If you’re scheduled for a full appraisal, you can take several steps to help prepare for a home appraisal. These include the following:

• Declutter and deep-clean. An appraiser isn’t allowed to make value judgments based on the cleanliness of your house. However, decluttering isn’t a bad idea. Making sure the appraiser has open pathways to get where they need to go in your home is important. In terms of cleanliness, things like mold are considered a health hazard that needs to be remediated before the home can be sold. Doing some quick cleaning can help.

• List upgrades and improvements. You should make a quick list of upgrades and improvements you’ve made to your home prior to the appraisal. You can point these out for the appraiser. Anything that could set you apart and add to the value doesn’t hurt to mention.

• Research comps. Doing research on comparable sales – or real estate comps – could give you a good idea of what the value might be in advance the appraisal. This will help you determine whether you would be able to accomplish your goals through your home equity.

• Test your home’s systems. As part of checking out the condition, an appraiser is going to make sure everything in the home is working, including your HVAC, electrical and water. Checking these out in advance will help you avoid any surprises.
• Don’t forget the curb appeal. The interior of your home is judged, but so is the exterior. Be sure to spend some time sprucing up the curb appeal of your house so that you can put your best foot forward.
• Attend the appraisal. Because you own the home, you’ll have to let the appraiser in, so you’re allowed to attend an appraisal for a refinance. This is important because you’ll be able to answer the appraiser’s questions so they’re getting the right information.

Do Lenders Always Require An Appraisal For Home Equity Loans?

The majority of the time, a new valuation will be required to get a home equity loan. There may be some instances in which you can get a loan without new data if the lender already has a pre-existing relationship with you. However, these loans may be in smaller amounts because a lender doesn’t want to risk loaning more than the home is worth.

Other Options For No-Appraisal Financing

Not every type of financing requires an appraisal, so let’s run through some of the alternatives.

• Personal loan: There’s no collateral associated with a personal loan. Our friends at Rocket Loans^SM can help you see your options. Interest rates on these are higher than they would be 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: This can work similarly to a home equity line of credit (HELOC) in that you’re given a certain amount of money you have access to that you can draw from and pay interest on with the flexibility to put the money back later to use for another project. The difference is, these tend to be bank-issued and they aren’t secured by collateral.

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

• Contractor financing: Certain contractors may be willing to extend financing to you on their own terms. Make sure to read through everything thoroughly and make sure that the terms make financial sense for you.

• FHA Title 1 Home Improvement Loan: The FHA Title 1 Home Improvement Loan is intended to offer home improvement funds to those who might not otherwise qualify given limited home equity. Loan limits vary depending on the type of property you have, but it can be as much as $25,000 for a single-family structure. If the loan is under $7,500, you don’t need any property securing it.

The Bottom Line

Most home equity loans are going to require a new property valuation to get approved. Although this may be an appraisal, you may be eligible for an AVM, saving you time and money by the completion of an algorithmic analysis based on available data about your property and its value and features in relation to the surrounding real estate market.

If a full appraisal is desired or necessary, you can prepare by testing your home systems and making a list of improvements that you’ve made over the years. If you don’t have a ton of equity, there are other options such as personal loans and contractor financing for funding.

If you’re considering a Home Equity Loan, you can start an application.

¹Automated 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. Additional restrictions/exclusions may apply. This is not a commitment to lend.

²Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Iowa is $61,000). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. Not available in Texas. This is not a commitment to lend.