Home Equity Loan Appraisals: What To Consider And How To Prepare

A home equity loan lets you borrow equity from your home in the form of a lump sum of cash, which you can then use at your own discretion. Most lenders, however, will require an appraisal of your home before letting you tap into its equity.

Read on to learn more about home equity loan appraisal, including different types of appraisals and alternative financing options.

Do You Need To Get An Appraisal For A Home Equity Loan?

Generally speaking, securing a home equity loan will require an appraisal. An appraisal protects your lender’s investment by determining the value and condition of your home. This ensures that you won’t borrow more from your home than you actually own – leaving part of the loan unsecured, which puts your lender at risk of losing money.

Why Does A Home Equity Loan Require An Appraisal?

By requiring an appraisal before letting you tap into your home equity, lenders protect themselves from financial loss. An appraisal provides insight into the value of your home and its condition.

An accurate value helps calculate how much equity you have in your home. Lenders typically only will allow you to take a portion of your equity. This way, they can recoup their investment if you happen to default.

Types Of Appraisals For A Home Equity Loan

There are many different types of home appraisals for homeowners to choose from. While your mortgage lender might not accept all types, it’s important to consider your options. Consult with your real estate professional if you need help deciding which type of appraisal is best for your situation.

Full Appraisal

What comes to mind when you hear the word “appraisal?” Like most people, maybe you immediately think of a licensed appraisal contractor that walks through a home to examine its value, condition and safety. This process is known as a full appraisal – the most common type of home equity loan appraisal.

During a full appraisal, an appraiser will first and foremost assess the safety and structural integrity of the home. If there are any significant issues, you’ll have to resolve them before receiving a home equity loan.

Next up on an appraiser’s to-do list is to determine your home’s appraised value. Usually, this involves comparing your home to similar homes in the area along with a few other factors, such as location, age, amenities and more. That being said, any upgrades you make to your home may help boost its value.

Drive-By Appraisal

Also called an “exterior-only appraisal,” a drive-by appraisal is when an appraiser only inspects the outside of a home. Since the inside of the home isn’t assessed, the appraiser relies mostly on public records, online listing photos and any other available information.

A drive-by appraisal can be appealing to many homeowners since it’s usually a less expensive and more convenient option; homeowners don’t even need to be present during a drive-by appraisal. However, a drive-by appraisal can also be less accurate, outdated and overlook major interior issues that result in an inaccurate property valuation.

Automated Valuation Model (AVM)

An appraiser must be human, right? Not necessarily. An automated valuation model, or AVM, is a type of home appraisal that relies on data from a computer software to determine your home’s value. AVMs work by combining mathematical equations and existing data on your home and surrounding properties to generate a property value.

Using an AVM can make your appraisal experience fast and sometimes even free of cost. While some providers charge for this service, there are free online sites you can use. However, you should use an AVM with caution, as outdated or inexact data can produce inaccurate property valuations.

Desktop Appraisal

True to its name, a desktop appraisal can be conducted without an appraiser even having to leave their desk. An appraiser will use a variety of public and private records, such as tax documents and Multiple Listing Service (MLS) data, to determine the value of your home.

Since a desktop appraisal doesn’t require an appraiser to personally visit your home, it’s typically not as expensive. However, it may not be as accurate as a full appraisal, which could cost you more money down the line.

Hybrid Appraisal

A hybrid appraisal is one where a trained third party conducts a property inspection and then passes on the collected information to a licensed appraiser. While a hybrid appraisal may save you money, it’s important to make sure the inspection is done thoroughly and accurately.

Factors That Can Affect Your Home’s Value For A Home Equity Loan Appraisal

During the appraisal process, your home’s value will be evaluated based on a number of factors. Here are just a few factors that can affect your home’s value when getting an appraisal.

Deferred Maintenance

When a homeowner fails to maintain their property, this is known as deferred maintenance. Putting off necessary repairs, whether big or small, can lower the appraised value of your home. You can preserve the value of your home by fixing issues immediately and deep cleaning your home on a regular basis. A clean, well-maintained home will have a higher value than a neglected home in need of repair.

Unfinished Renovations

It’s no secret that renovations can significantly boost the value of your home. DIY renovation projects can especially help you build sweat equity. Unfinished renovations, however, can lower the as-is value of your home – that is, how much your home is worth in its current state. Until the renovation is complete, an appraiser may see the project as more of a liability than an asset. That’s why it’s usually best to complete all renovations before getting a home equity loan appraisal.

Nearby Comparables

Real estate comparables, also called comps, refer to the recently sold homes in your area that are similar to your property. When determining the value of your home, appraisers will look at comps to establish its fair market value.

Of course, homeowners have no control over the value of surrounding homes. However, comparables can lower the value of your home depending on local market conditions and trends. Consider making a list of recently sold homes in your area that help the valuation of your home and giving it to your appraiser. This may help you to receive a higher amount of equity.

Can You Get A No-Appraisal Home Equity Loan?

In most cases, you will need an appraisal in order to receive a home equity loan. Some lenders, however, may offer loan alternatives that don’t require a full appraisal. Though these alternatives may come with certain restrictions, you can consult with your lender to explore your options.

Alternative Financing Options That Don’t Require An Appraisal

While a home equity loan will more than likely require an appraisal, consider a few home equity loan alternatives that don’t require having your home appraised.

• Credit card: Credit cards are one of fastest and most convenient ways to borrow money without tapping into home equity. Some cards even have special introductory interest rates. Once the introductory period ends, though, interest rates can skyrocket and leave you with significant debt if you’re not careful. Use credit cards cautiously as a home equity loan alternative.
• Personal loan: Based on your income and credit history, you may be able to receive a personal loan without putting up your home as collateral. It’s typically a quick process with fewer requirements than a home equity loan. However, interest rates can be extremely high and there are often limits to what you can borrow. 
• FHA Title 1 loan: FHA-approved lenders lend money to eligible borrowers for home improvements and repairs. Essentially, the money can be used on anything that makes your home better to live in. Smaller loans are unsecured, while larger ones typically require using your home as collateral.

The Bottom Line: A Home Equity Loan Appraisal Dictates The Value You Can Borrow

In most cases, getting an appraisal is a necessary step homeowners must take before receiving a home equity loan. However, some lenders may offer alternative financing options that don’t require an appraisal.

If you feel ready to take on a home equity loan, our friends at Rocket Mortgage^® can help you begin the approval process today!