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Yes, you can still get a home equity loan without getting a formal appraisal done on your property. Lenders have options for determining the market value of your home beside using traditional, full appraisals. These can involve the use of data analysis, public records or even a quick drive-by observation. Read on to learn about when an appraisal may not be needed and some tips for maximizing your home’s appraised value.
- Are Appraisals Required for All Home Equity Loans?
- How Do Appraisals Work for Home Equity Loans and HELOCs?
- How to Calculate Your Home Equity Stake from Your Appraised Value
- How to Maximize Your Home's Appraised Value
- What if the Appraisal Comes in Too Low?
Are Appraisals Required for All Home Equity Loans?
Full property appraisals aren’t required by many home equity lenders who rely on other methods for establishing your property value. Lenders often use county assessment records and automated valuation models (AVMs) to find a comparable price for your home. This may allow you to reduce your closing costs for a home equity loan.
Here are the scenarios when a full appraisal report may not be needed:
- A recent appraisal report is available for the lender to review (typically completed within the past 180 days).
- A very low loan-to-value percentage is requested (where an appraisal would be considered just formality).
- Getting a home equity loan from the lender who holds your first mortgage (and presumably has a good idea of your property value already).
- An alternative valuation system is used, such as an AVM or tax-equalized value.
In some cases, if a full appraisal, limited appraisal, or desk review are required, the lender might allow you to roll the cost of these into the loan, or include it with their other fees. Generally, the cost for third-party services like appraisals have already been accounted for elsewhere in the loan process — whether it’s out-of-pocket for you or not.
How Do Appraisals Work for Home Equity Loans and HELOCs?
Home equity lines of credit, known as HELOCs, and home equity loans generally require the same data to underwrite as mortgage loans. However, primary mortgage loans require full appraisals in order to meet lending guidelines set by government agencies or private investors, while home equity products aren’t subject to the same guidelines.
In either case, your lender will need to establish a value using some form of sales comparison approach. Unlike the full appraisals required for primary mortgages, home equity lenders have more leeway in determining how they conduct that comparison. Consequently, laxer appraisal requirements my reduce how long it takes to close on a home equity loan relative to a standard mortgage.
This involves a licensed appraiser coming out to your property, taking measurements and pictures, and observing the inside of your home for defects. They then produce a report comparing your property with recent sales of similar properties in the area. The cost of a full appraisal ranges from $400 to $800 or more, depending on the property and where it’s located.
Limited or "Exterior Only" Appraisal
Also known as a drive-by appraisal, this involves the appraiser evaluating only the exterior of your home, and the surrounding neighborhood. They will still prepare a report, comparing your home with recently sold properties in your area. The cost of a drive-by appraisal ranges from $250 to $400.
Sometimes referred to as a desk review, this methodology relies purely on property value data obtained from county records and market data to ascertain market value. The cost of a desk review varies from lender to lender, but is typically one of the cheapest appraisal options. Expect a fee between $50 and $150 if the lender doesn’t cover this cost.
The county tax assessor sets an assessed value, based on the market value of your property. This value is then adjusted so that it’s set at the approved taxation level for the area. (Lenders can then use this information and data to work backwards to the estimated market value and typically charge the same as their desk review fee.)
How to Calculate Your Home Equity Stake From Your Appraised Value
Once the lender has determined the appraised value on your home, the amount of equity available to borrow is determined by the lender’s permitted loan-to-value (LTV) percentage. Most home equity lenders will go up to 80% or 90% in loan-to-value, while a few specialty lenders may be willing to go up to 100%.
To calculate how much you can borrow against your home, you’ll first need to calculate your current home equity stake. This will be equal to your home’s value, minus any existing loans against the property:
home equity = home value - debts
For example, if your home is valued at $450,000 and your existing mortgage balance is $250,000, subtract your mortgage balance from your home’s value to get your equity stake in the property of $200,000.
Next, you’ll need to figure out how much equity you can access based on the lender’s maximum permitted LTV. Multiply your home’s appraised value by the lender’s permitted LTV, then subtract any debts you currently owe on the property to arrive at the amount you can borrow:
available equity = (home value × LTV%) - debts
Continuing with our example; if your home is valued at $450,000 and your equity lender permits you to draw up to 90% of it in your loan, then the maximum loan amount will be $405,000. Subtracting out your existing mortgage balance of $250,000, the available equity in your property will be $155,000.
How to Maximize Your Home's Appraised Value
If you’re required to undergo a full appraisal, an appraiser will enter your property to examine its condition. You’ll need the appraisal to come in as high as possible if you want to be able to borrow as much as you can. To maximize your home’s appraised value, it’s in your best interest to improve the appearance of your home using the following steps:
Making Your Home Look its Best for the Appraisal
Perform any routine or other maintenance tasks, clean and declutter, and get your home ready for its “close-up” — the appraiser will take photos as part of their evaluation and include them in their report. This can be as simple as a new paint job or even repairing minor visual defects.
Collect Information on Comparable Properties
You know your neighborhood better than anyone, so gather information on recent sales and present the most favorable ones to the appraiser for their consideration. Hopefully they’ll include some or all of them as comps in their report.
Point Out any Major Improvements You've Made
It can be hard for an appraiser to tell just by looking at your home what improvements you’ve made. So, if you’ve renovated your kitchen, put in a half-bath downstairs, or installed a new deck be sure to let the appraiser know when you did it and how much it cost.
Be Prepared to Answer Any Questions About the House
You’re the appraiser’s best resource for factual knowledge about your home, so brush up on your home’s details and be prepared to fill the appraiser in with the most accurate information.
By maximizing your home’s appraised value, you’ll increase the amount that you might be able to borrow. Also, your combined loan-to-value or CLTV calculation plays a major role in determining the interest rates and terms you qualify for on your home equity loan. It can even impact the rate you receive on your primary mortgage if you’re thinking of refinancing the property. Regardless of whether you intend to use it or not, more equity is generally better than less.
When evaluating your property, appraisers gather a lot of information on your home to compare with similar properties in your area that sold recently. Details about the square footage, age of the property, condition and even construction quality will all be noted in the appraisal report and can have a major impact on your home’s value. It’s generally in your best interest to double check all details in the appraisal report when completed.
What if the Appraisal Comes in Too Low?
If your appraisal comes back too low, you may attempt to challenge the appraisal report through a rebuttal process. Just keep in mind that since appraisals are ultimately “opinions of value,” there’s no guarantee that you’ll be able to change the outcome of their findings.
- Begin by reading the appraiser’s report thoroughly and identifying any material errors (like the number of bedrooms and bathrooms, square footage, and lot size).
- Review the comparable properties that were used and see if you can find better ones (closer in proximity, age, and quality to your property than the ones used in the original report).
- Decide which areas of the report you’re going to request be reconsidered, and provide supporting information to justify your request.
Be prepared, as most appraisal rebuttals won’t result in changes to the report or the opinion of value. Just because you receive a low appraisal doesn’t mean you’re stuck with that value forever though. Appraisals are usually only considered valid for 120 to 180 days, so it’s possible for you to restart the process once your home has a chance to appreciate in value.