Do I Need an Appraisal for a Home Equity Loan?

Getting approved for a home equity loan usually requires an appraisal of your home. The appraisal determines your home’s current market value which allows the lender to calculate how much equity you have available to borrow against.

What is a Home Appraisal?

A home appraisal is an estimate of your home’s market value performed by a licensed professional appraiser. The appraiser will physically inspect your home, inside and out, taking note of its size, age, condition, upgrades, and other features They will also analyze recent sales of comparable homes in your area.

Appraisers use this information to provide an unbiased opinion on how much your home could sell for in its current condition. This appraised value is crucial for lenders, as it allows them to determine if there is enough equity in the home to secure the loan.

Why Lenders Require Appraisals for Home Equity Loans

There are two main reasons lenders require appraisals for home equity loans

• To calculate your home equity: Home equity is the difference between what you owe on your mortgage and your home’s current market value. An appraisal gives the lender an accurate estimate of your home’s value, allowing them to determine how much equity you have available to borrow against.

• To mitigate risk: Home equity loans are secured by your home, meaning if you default the lender can foreclose and sell your home to recover their money. An appraisal ensures the lender doesn’t loan you more than your home is worth, protecting them if foreclosure occurs.

Without an appraisal, the lender is essentially lending blindly, not knowing if the amount borrowed exceeds the home’s market value. This leaves them vulnerable if the borrower defaults.

How Much Equity Can You Borrow?

Lenders typically allow you to borrow up to 85% of your home’s value in total loan amounts. For example:

• Your home is worth $300,000 based on the appraisal
• You owe $150,000 on your existing mortgage
• You have $150,000 in equity ($300k value – $150k mortgage)
• The lender will let you borrow up to 85% of the home’s value, or $255,000
• So you can get a home equity loan for $105,000 ($255k max – $150k existing mortgage)

This 85% limit protects the lender by ensuring at least 15% equity remains in the home. The more equity you have, the lower your loan-to-value ratio is, making you less of a risk for the lender.

What Are the Different Types of Home Appraisals?

There are several different appraisal methods lenders may use:

• Full appraisal: The most thorough option. The appraiser will conduct an interior and exterior inspection of the home and evaluate comparable property sales. This provides the most accurate estimate of value.

• Drive-by appraisal: The appraiser only does an exterior inspection of the home and does not go inside. Relies more heavily on public records.

• Desktop appraisal: Done completely electronically with no physical inspection. Uses public records, MLS data, and AVMs to estimate value.

• Broker’s Price Opinion (BPO): A licensed real estate agent gives an informal estimate of value based on limited information.

• Automated Valuation Model (AVM): Computer software estimates the home’s value based on public property records, MLS data, and valuations of comparable properties.

Full interior appraisals provide the most detailed and accurate valuations. However, drive-by and desktop appraisals are quicker and less expensive for lenders. AVMs are the fastest and cheapest option but may not account for all factors affecting value.

How to Get the Most Accurate Appraisal

While appraisers aim to be unbiased, there are things you can do to ensure your home is appraised fairly and accurately:

• Clean and declutter so the appraiser can easily inspect all areas of the home.

• Make minor repairs like leaky faucets, broken cabinets, or cracked walls.

• Highlight upgrades and renovations like a remodeled kitchen or new roof.

• Improve curb appeal by mowing, planting flowers, painting the front door. First impressions matter.

• Research recent comparable sales so you can point out any the appraiser misses.

• Be present at the inspection to answer the appraiser’s questions.

• Follow up on low valuations by asking the lender to reconsider or order a second appraisal.

Alternatives If You Don’t Want an Appraisal

If you want to avoid an appraisal, here are a couple options, though they have some downsides:

• Home equity line of credit (HELOC): Some lenders approve HELOCs without an appraisal based on your credit score and income. However, the loan amount is likely to be lower without knowing your home value.

• Home improvement loans: Offered by some contractors to finance renovations. Rates are often very high.

• Personal loans: Unsecured loans based on your creditworthiness, so no appraisal is needed. But interest rates are higher than home equity loans.

• Credit cards: Useful for small projects but credit limits and high interest make them impractical for big expenses.

The Bottom Line

In most cases, an appraisal is required for a home equity loan, as it allows the lender to determine how much equity is available and adequately assess lending risk. While appraisals add time and cost, they ultimately protect both the lender and the borrower.

Preparing your home and providing useful information to the appraiser can help maximize your home’s appraised value. But if you really want to avoid the appraisal, products like personal loans or credit cards may be an option, with some trade-offs.