If you’re applying for a home equity loan, almost all lenders will require an appraisal to determine the value of your home. Thus, a home equity loan does require an appraisal. The same is true for other types of home loans, including a cash-out refinance, rate and term refinance, and home equity line of credit.
There are different types of appraisals that can be done. Some will require a certified appraiser to physically inspect your home in person, while others may only require a computerized estimate of your home’s value (called an Automated Value Model, or AVM).
The type of appraisal required will be determined primarily by your lender, the loan terms you’re requesting, and the characteristics of your home. Read on as we’ll go through the details of how each appraisal works and what you can do if it ends up hurting your chances of getting a loan.
Why is an appraisal required for home equity loans?
An appraisal tells a lender what your home is currently worth. It will then use this information to determine the maximum loan amount it can lend. Most home equity lenders will only issue home loans up to a maximum of 80% to 90% of the value of a home, so you’ll need to have enough home equity to start the process.
This limit is set in place to limit the lender’s risk exposure. Home equity loans use the property as collateral, allowing the lender to foreclose on the property in the event you default on payments. In other words, if you miss enough payments, the lender can take possession of the property and resell it to recoup some of its losses. In a scenario where a lender must foreclose, it will still incur fees, which is why lenders rarely lend up to the full value of a property.
What are the different types of appraisals and how does each work?
A home equity loan appraisal can most commonly be either an automated valuation model (AVM), a driveby appraisal, or a full interior/exterior appraisal. However, other types of appraisals exist that combine characteristics from each of these.
Although all of these strive to accomplish the same goal of providing the most accurate indicator of value for a home, there will be some limitations as each type of appraisal considers different factors.
Automated Valuation Model (AVM)
An AVM searches public records to obtain as much information as possible about your home’s features and characteristics. It will then try to find similar homes that have also recently sold within your neighborhood. Here are some examples of residential real estate data an AVM can consider in determining what your home is worth:
- Type of home (single family, condominium, townhome, multi-unit, manufactured home, etc.)
- Gross living area
- Number of bedrooms and bathrooms
- Size of garage or carport
- Location of homes recently sold in your neighborhood
- Number of homes recently sold
- Number of homes currently listed for sale in your neighborhood
- Market trend analysis
- Amount of homeowner’s association dues
- Amenities (pool, tennis courts, on-site gym, etc.)
- Special features (such as a guarded/gated community)
As the name suggests, this type of appraisal has a professional appraiser conduct a visual inspection of only the exterior of your home. It is also sometimes referred to as an exterior-only inspection.
It takes into consideration everything that an AVM does and more. Rather than relying solely on a computerized model, this type of appraisal adds the expertise of a certified appraiser to reach an opinion of value for your property. As a result, you’ll get a more accurate appraisal value.
Here are some examples of additional items that are taken into consideration that an AVM may not:
- Location to amenities (entertainment, food, shopping, schools, etc.)
- A greater level of accuracy on the number of homes recently sold
- Number, type, and impact of distressed sales on home values
- Proximity to negative external sources, such as a noisy road or power lines
Full interior/exterior appraisal
The most comprehensive type of appraisal done for a home equity loan is a full interior and exterior inspection of your property, sometimes referred to as a “full appraisal” for short. In addition to the items reviewed in an AVM and a drive-by appraisal, appraisers look at additional items such as:
- External features, such as a beneficial view of the ocean
- Functional layout of the home
- Upgrades and renovations recently completed
- Materials used in construction
- Condition of paint, flooring, and interior walls
- Condition of roof and exterior walls
- Presence of any health/safety hazards
- Impact of seller concessions on the final purchase price
- Predominant type of financing and impact on home values
What if I do not agree with the appraisal?
Within several days of an appraisal inspection being completed, you’ll be given a report with the appraiser’s opinion of value and how they reached that figure. If you don’t agree with an appraiser’s evaluation of your home, you do have the ability to provide a rebuttal to have your home’s value reconsidered. Here are some of the steps you can take:
- Verify the accuracy of the appraisal: While you may not be a certified appraiser, you can double-check the accuracy of the information the appraiser used for your home. This can include the size of your home, room count, description of appliances, and other features.
- Request a more thorough appraisal to be completed: Appraisals have limitations and a more thorough appraisal, while it may come at an added cost, can consider items that can have a positive impact on your home’s valuation.
- Provide the appraiser with better comparable properties: The value of your home is largely based on the comparable properties (comps) the appraiser has selected, so you’ll need to find better comps. As a general rule of thumb, the best comps are homes that have sold within 1 mile of your home, have a close of escrow date within the past 1 to 3 months, and have similar characteristics to your home (such as living area, bedroom, and bathroom count).
- Pay for another appraisal: Some lenders will allow you to pay for a second appraisal of the same type. You’ll usually have to pay for this, however, and there is no guarantee that a second appraisal will yield a higher value.
Frequently Asked Questions (FAQs)
How should I prepare for an appraisal?
In short, you should prepare for an appraisal by improving its curb appeal. You can finish up a home improvement project, tidy up the home, mow the lawn, and finish up any needed home repairs. This can also reduce the likelihood of a lender having concerns over potential health or safety hazards in your home. For more details, you can also read this guide on how to prepare for an appraisal.
How much does an appraisal cost?
An appraisal is a small part of the closing costs involved with getting a home equity loan. Appraisals can cost anywhere from $50 to as much as $800 or more. AVMs are the cheapest, costing lenders between $50 and $99. Driveby appraisals typically range from $100 to $250 depending on the complexity of the assignment. Finally, full interior/exterior appraisals can add anywhere from around $450 to your closing costs for a standard home, to as much as $800 and up for a larger or more complex property. And remember, refinance appraisals cost about the same as well.
What other options do I have if I can’t get a home equity loan because of an appraisal?
If home equity loans are not an option for you because of an appraisal issue, you can consider other financing options that do not use your home as collateral. Some examples can include a personal loan, credit card, and personal line of credit.
Is it possible to get a home equity loan without an appraisal?
Most home equity loans require a brand new appraisal, but if you’ve had another lender do an appraisal on your home within the last 180 days, you can ask your new lender if they can accept that appraisal report. Most lenders consider appraisals to be valid for 180 days, especially for home equity loans, but this can vary from lender to lender.
A home equity loan does require an appraisal
If you need to get a home equity loan, your lender will most likely have your home appraised to verify its condition and current value. Depending on the type of appraisal conducted, there are also things you can do beforehand to improve the likelihood that it will work in your favor. If you’re not able to get approved because of an appraisal, you still have other options, such as personal loans and other types of financing.