Does a Home Equity Loan Require an Appraisal?

Taking out a home equity loan can be a great way to access the equity in your home for major expenses, home improvements, debt consolidation, and more. But before a lender will approve you for a home equity loan, they generally require an appraisal of your home. Here’s what you need to know about home equity loan appraisals.

What is a Home Equity Loan?

A home equity loan is a type of loan that allows you to borrow against the equity in your home. Equity is the current market value of your home minus any outstanding mortgage debt. So if your home is worth $300000 and you owe $200,000 on your mortgage, you have $100000 in equity.

With a home equity loan, you can tap into that equity to receive a lump sum of cash that you can use for any purpose. The loan is secured by your home, meaning if you default the lender can foreclose.

Home equity loans have fixed interest rates and set repayment terms, usually between 10-30 years. You make regular monthly payments just like a standard mortgage.

Why Do Lenders Require an Appraisal?

When you apply for a home equity loan, the lender will almost always require a formal appraisal of your home. There are two key reasons lenders require appraisals:

1. To determine current property value. The appraisal provides the lender with an estimate of your home’s current market value. This allows the lender to calculate how much equity you have available to borrow against.

2. To assess property condition. The appraisal also evaluates the overall condition of the home. This ensures the property is in good shape and adequate collateral for the loan.

How Does the Appraisal Impact Your Loan Amount?

The appraised value directly affects how much you can borrow with a home equity loan. Lenders generally let you borrow up to 80-85% of your home’s value minus what you owe on your existing mortgage.

For example:

• Your home appraises for $400,000
• You have a $200,000 mortgage balance
• You have $200,000 in equity
• The lender will let you borrow up to 80% of that equity
• So your maximum home equity loan would be around $160,000

If the appraisal comes in lower than expected, you may not be able to borrow as much as you had hoped. On the flip side, a higher appraisal could mean you can qualify for more funds.

What Does the Appraisal Process Entail?

There are a few ways lenders can appraise your home:

Full appraisal: A licensed appraiser will visit your home, conduct a thorough inspection of the interior and exterior, take measurements, and evaluate your neighborhood and comparable home sales. This provides the most accurate valuation.

Drive-by appraisal: The appraiser performs an exterior-only inspection, does not go inside your home, and relies more heavily on public records. Generally less accurate than a full appraisal.

Automated valuation model (AVM): Computer software estimates your home’s value based on public data like tax assessments and home sales in your zip code. Fast and inexpensive but less precise.

Broker’s price opinion (BPO): A real estate agent or broker provides a market value estimate based on limited inspection and data review. Less rigorous than a full appraisal.

Lenders have discretion over which method to use, Full appraisals are common but drive-by and AVM appraisals can streamline the process

How Can You Prepare for the Appraisal?

If your lender orders a full interior appraisal, you’ll want to make sure your home shows at its absolute best to maximize the value. Here are some tips:

• Declutter and deep clean the entire home.
• Make minor repairs – fix leaky faucets, patch holes in walls, touch up paint, etc.
• Tend to exterior and landscaping – trim bushes, mow lawn, enhance curb appeal.
• Highlight upgrades and renovations.
• Test appliances, electrical, plumbing and HVAC systems.
• Gather permit paperwork for renovations.

Preparing your home and providing documents that support the value can help you get the highest appraisal possible.

Are Appraisals Ever Waived?

In certain cases, a lender may waive the appraisal requirement for a home equity loan:

• If you recently purchased the home. The lender may rely on the appraisal from your original purchase.

• If you’re borrowing a small amount. For smaller loans under $100,000, the lender may be comfortable using an AVM.

• If you have an existing relationship. Established customers may get an appraisal waiver as a perk.

• If you agree to a lower LTV. With less risk, the lender may skip the appraisal.

But in general, expect to get your home appraised when applying for a decent sized home equity loan from most mainstream lenders. It’s a standard part of the process.

Alternatives If You Want to Skip the Appraisal

If you need funds quickly and want to avoid an appraisal, consider these options:

• Personal loan – Unsecured loan with no appraisal. Higher rates but fast funding.

• Credit cards – Use credit cards for small expenses. No appraisal obviously.

• Cash-out mortgage refinance – Refinance into a larger mortgage and get cash. May require appraisal.

• Home equity line of credit (HELOC) – Revolving credit line tied to home equity. Often no appraisal when initially approved.

The Takeaway

In most cases, expect to get a home appraisal when applying for a home equity loan. It likely won’t be waived unless you meet certain exception criteria. The appraisal allows the lender to confirm your home value and condition before approving your loan. Take steps to prepare your home and review comparable sales to ensure you get the highest appraisal possible. This will allow you to maximize the amount you can borrow against your hard-earned home equity.