Home Equity Loan Appraisal: What You Need To Know
January 29, 2024 8-minute read
Author: Kevin Graham
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.
Does Your 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. 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® requires a full appraisal for the Home Equity Loans it offers.1 Other lenders may take different approaches and we’ll discuss the strengths and weaknesses of these a bit later on.
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Why Do Home Equity Loans Require An Appraisal?
For lenders, in 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.
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. Again, Rocket Mortgage requires a full appraisal.
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 with in the house such as electrical, water and HVAC to make an evaluation of its condition.
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 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.
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.
Automated Valuation Model (AVM)
An automated valuation model (AVM) takes humans out of the process entirely. 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.
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.
How Should You Prepare For Your Home Equity Loan Appraisal?
If you’re applying for a home equity loan, 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, an appraisal will be required to get a home equity loan. There may be some instances in which you can get a loan without a prior appraisal 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 LoansSM 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 an appraisal to get approved. Many lenders, including Rocket Mortgage, require a full appraisal to determine the appropriate home value. There are other options, but they are less commonly used.
To prepare, test your home systems and make 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.
1 Home Equity Loan product requires full documentation of income and assets, credit score and Max LTV/CLTV/HCLTV. Requirements are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 75%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 760 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 45% or below. Valid for loan amounts between $45,000.00 and $350,000.00 (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. To qualify for these loan programs, you must be the age of majority in your state with a valid U.S. residency. 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. Formal approval will be subject to satisfactory verification of income, assets, credit, property condition and value. Additional restrictions apply. Not available in Texas.
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