Home equity loans are popular financing options that many homeowners turn to for different purposes. Although home appraisals are usually required to qualify, a full appraisal may not be needed for all loans. It depends on how much you are borrowing, your bank or credit union’s lending criteria, and other factors.
A home equity loan can be a great way to access funds using the equity you’ve built up in your home. But before a lender will approve you for one of these loans, they’ll want to determine how much equity you actually have available to borrow against. That’s where the appraisal comes in.
What is a Home Equity Loan Appraisal?
An appraisal is an estimate of your home’s current market value. It’s performed by a licensed professional appraiser who will physically inspect both the interior and exterior of your property.
The appraiser will look at things like
- Number of bedrooms/bathrooms
- Overall condition
- Upgrades and renovations
- Curb appeal
- Comparable home sales in your area
They use this information to determine what a buyer would reasonably pay for your home in its current state if you were to put it on the market. This establishes your home’s fair market value.
Lenders require appraisals on home equity loans to protect their investment and ensure you don’t borrow more than what your home is actually worth
Why Do Lenders Require Appraisals?
There are two key reasons lenders require appraisals for home equity loans:
1. To Determine Your Home Equity
Your home equity is the difference between what your home is worth and what you owe on your mortgage. For example:
- Your home value is $300,000
- You owe $180,000 on your mortgage
- So your equity is $120,000
The appraisal gives the lender an accurate picture of your current home value, which allows them to calculate your equity. Most lenders will let you borrow up to 80-90% of your total equity.
2. To Assess Property Condition
The appraiser doesn’t just look at your home’s value. They also inspect the overall condition inside and out.
Lenders want to ensure your property is well-maintained. If you end up defaulting on the loan, they need to know they can sell it in good condition to recover their money.
So while value is important, the physical state of your home matters too. The appraisal covers both.
Do All Home Equity Lenders Require Appraisals?
In most cases, yes. The majority of lenders will require a full appraisal before approving a home equity loan.
However, in certain situations a lender may offer alternative valuation methods, such as:
- Drive-by appraisal – Inspector only views exterior of home
- Desktop appraisal – Uses public records and data instead of inspection
- Automated valuation model – Software estimates value based on comps
The main drawback to these options is they may be less accurate than a full appraisal. For most borrowers, expect to complete a standard interior/exterior appraisal.
How Much Does a Home Equity Appraisal Cost?
Appraisal fees can range anywhere from $300 to $600 on average, depending on your location and other factors. Some key things that influence cost:
- Appraiser experience level
- Home size/features
- Rural vs. urban location
Your lender may cover the cost upfront or require you to pay it out of pocket. Be sure to ask about appraisal fees when applying so you know what to expect.
How Can I Prepare for a Home Equity Appraisal?
Here are some tips to prepare your home before the appraiser arrives:
- Clean and declutter all rooms
- Make small repairs (leaky faucets, cracked tiles, etc)
- Cut the grass, trim bushes, and tidy up curb appeal
- Gather info on upgrades like remodels or new roofs
You want your home to look its best to maximize the appraised value. Doing prep work can help boost your chances.
What Happens If My Home Appraises for Less?
If the appraisal comes in lower than expected, you have a couple options:
-
Accept a smaller loan amount – The lender will only lend based on the appraised value. So you’d get approved for less than originally hoped.
-
Dispute the valuation – You can argue why you think the appraisal is too low and provide supporting evidence. But there’s no guarantee it will change.
-
Pay for a second appraisal – Getting a totally new valuation could produce a different result. But you’d have to pay the fees again.
-
Cancel the loan – If the appraised value is way off, you can walk away and apply with another lender later when home values rise.
No matter what, the lender will only go off of the appraisal, not your estimate of value. So be prepared in case it comes in lower than expected.
The Bottom Line
At the end of the day, an appraisal is a key requirement when applying for a home equity loan. The valuation establishes how much equity you have to work with and allows the lender to assess risk.
While appraisals come with fees and preparation work, they’re a necessary step. Take time to declutter, make repairs, and understand the process. This will set you up for success when seeking funds through a home equity loan.
Make Sure It’s Clean
Making sure your home is clean and tidy will help the appraiser to see it in its best light. A home that is clean and clutter-free may appear more valuable than one that looks lived-in. If you have a lot of clutter you need to temporarily remove, consider renting a mini-storage unit.
Can You Get a Home Equity Loan Without an Appraisal?
Although an appraisal is typically required for a home equity loan, a full appraisal may not be required for all loans. It primarily depends on the amount of the loan, although your credit score may also be an important factor.
Different lenders will have different requirements for when a full appraisal is needed. A lender may not require a full appraisal, for example, if the loan is for $100,000 or less. A full appraisal may also not be needed if a recent appraisal has been done and the information is still current.
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FAQ
Are appraisals required for home equity loans?
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 and typically have higher borrowing rates.
What disqualifies you from a home equity loan?
A high debt-to-income ratio can limit the loan amount you qualify for or even prevent approval. For instance, if your existing debt outweighs your income, it could hinder your ability to secure the full amount you need or obtain the most favorable interest rates on your home equity loan.
Are second appraisal required?
Guidelines Require Two Appraisals
Other programs may require two appraisals if the subject property is a flip. A flip is when an investor bought the home, remodeled it, and sells it for a profit, all within a few months. The investor wants to ensure the value is accurate with such a rapid increase in price.
What type of loan does not require an appraisal?
What homes qualify for no appraisal FHA mortgages. For a purchase, HUD homes are the the only homes you can buy without an appraisal.