Lenders require appraisals for home equity loans and HELOCs to reduce the risk of default and ensure they can recover the loan amount if borrowers do not repay.
Home equity loans are popular for homeowners looking to make upgrades or repairs to their homes. However, these loans have several requirements, including a home appraisal. Fortunately, there are alternatives for funding home renovations. Home equity loans can also be used for purposes such as paying off debt or funding education expenses. There are alternatives for those uses as well.
Key Takeaways
- All home equity loans require an appraisal.
- There are different types of home appraisals that lenders may require.
- If you don’t have enough equity in your home or prefer to avoid an appraisal, consider alternatives to a home equity loan.
Understanding Home Equity Loan Appraisals
When you apply for a home equity loan, the lender typically orders an appraisal. This helps them assess the current market value and condition of the property. The lender hires a licensed appraiser to visit and evaluate the property. The appraiser will also research the value of similar homes in your neighborhood to help determine the property’s current market value.
Why Do Home Equity Loans Require an Appraisal?
When you apply for any home loan, the lender will assess the risks of lending the requested amount. A home appraisal helps the lender understand the amount of equity in your home. Besides the appraisal, the lender will consider your credit history and other factors to determine eligibility.
Can You Get a Home Equity Loan Without an Appraisal?
In some cases, you may obtain a home equity loan without an appraisal. It depends on the lender’s requirements. Some lenders may waive a full appraisal if a recent one is available. Lenders might also not require a full appraisal for smaller loan amounts.
Types of Appraisals for Home Equity Loans
Several types of appraisals may be required for home equity loans. Familiarizing yourself with these types helps you know what to expect.
Full Appraisal
A full appraisal is what most people envision when they think of a home appraisal. It is the most common type of appraisal for home equity loans. During a full appraisal, the appraiser inspects both the exterior and interior of the home. As the homeowner, you can usually walk through the property with the appraiser.
The home appraiser looks for several key elements. One is the general structure of the house and how well the house has been maintained. The appraiser will also check over all of the major systems within the home, including the electrical system, water system, and HVAC.
When the appraiser is done inspecting the property, they will compare your home with similar homes that have recently sold in the area. Then, the appraiser will put together the appraisal report and send it to you and your lender.
Drive-By or External-Only Appraisal
These appraisals involve only an external inspection. Instead of evaluating the interior, they use public records and online listing photos for information.
Typically, these appraisals are less expensive and more convenient for homeowners. However, since the appraiser does not enter the home, any updates that you’ve made since purchasing the home will not be factored into your home’s appraised value.
Automated Valuation Model (AVM)
An AVM uses software to estimate property value through algorithms. Instead of a human evaluator, the system uses data about the property and nearby homes to estimate value. As with external-only appraisals, AVMs do not consider recent upgrades.
Hybrid Appraisal
A hybrid appraisal may be used if licensed appraisers are scarce in your region. Instead, another individual inspects the property. They evaluate the home’s condition and send photos and data to the appraiser. The appraiser then writes and sends out the report based on this information.
Desktop Appraisal
A desktop appraisal does not require anyone to enter your home. It is similar to AVMs but involves a human compiling the information from public records and other sources.
Loan-to-Value (LTV) Ratio
The loan-to-value ratio (LTV) is a crucial factor in a home equity loan. This ratio compares the amount owed on your current mortgage to the home’s appraised value. Lenders set maximum LTV requirements for home equity loan qualification.
How to Prepare for Your Home Equity Loan Appraisal
As a homeowner, you can take steps to prepare for the appraisal. You can make changes that may increase your property value. Consider these ideas as you prepare.
Research the Current Market Value of Your Home
To estimate your home’s value, start by searching real estate websites. Look at nearby homes with a similar number of bedrooms and bathrooms. It’s also a good idea to look at the total square footage of the home and the size of the entire property.
Clean And Declutter Your Home
Ensure the appraiser can access all areas of your home for the best evaluation, it is best to ensure that the appraiser can access all of the nooks and crannies. While general cleanliness isn’t judged, it’s best to showcase the home fully.
Make Necessary Repairs
Making necessary repairs before the appraisal can significantly impact the value. If you’re getting a full appraisal, this applies to interior and exterior repairs. You may have purchased a home that needed some fixing, but if you’ve made repairs or upgrades since then, that can change the value of your home.
Increase the Curb Appeal
The first thing people notice is the home’s curb appeal. Day-to-day living is primarily influenced by the interior, but curb appeal is crucial for valuation. But when it comes to selling the home or evaluating the value of the home, the exterior appearance can make a big difference. It’s a good idea to tidy up the front yard and you could also include some plants or shrubbery to add more curbside appeal.
Provide Any Documentation Requested By The Lender
Applying for a home equity loan involves many of the same requirements as other loans. Stay in communication with the lender and provide the requested documentation. For example, you might need to provide pay stubs and tax returns to prove your income.
Be Present During the Appraisal
If possible, be present during the appraisal. During a full appraisal, walk through the property with the appraiser to answer questions. You can also explain any upgrades that you have facilitated since purchasing the property.
Alternatives for No-Appraisal Financing
If you need additional financing, consider these alternatives. You might want to take some of these financing options that don’t require an appraisal into consideration.
Personal Loan
Personal loans are an option for those seeking a lump sum to repay over time. These loans do not require any collateral; lenders consider your credit history and current finances for eligibility. Personal loans can be used for essentially anything, including home renovations, wedding funds, student loans and more. If you use a personal loan, you’ll repay the loan through monthly payments based on the amount borrowed, your interest rate, and the loan term.
Credit Card
Credit cards offer flexibility in spending. With a credit card, you have access to a line of credit you can use as you repay your balance. To maximize the benefits of a credit card, look for one that has a low or no interest period. This can allow you to borrow what you need upfront and save on interest as you pay off the balance.
Personal Line of Credit
A personal line of credit provides a revolving line of credit similar to a credit card. However, they work differently from a credit card. Banks and credit unions typically offer personal lines of credit. To use the line of credit, request a transfer to your checking account or use special checks. Then your bank or credit union will send you a monthly bill with your total balance and your minimum payment amount.
FHA Title 1 Home Improvement Loan
An FHA Title 1 Home Improvement Loan is a loan that can be used for home improvements and repairs. These fixed-rate loans are available from FHA-approved lenders. Smaller loans are usually unsecured, while larger loans may require your home as collateral.
Home Equity Investment
A home equity investment is different from a home equity loan, and an appraisal is required. It allows you to sell some of your home's future appreciation, providing you cash without a monthly payment. You can receive a lump payment and then share a percentage of your home's appreciation when you sell or refinance at a later date. It can be an option for a homeowner who already has significant equity and is willing to trade some of that for a lump sum.
Contractor Financing
Contractor financing can be a good alternative if you’re looking for an affordable, short-term financing option to fund home renovations. This financing can be more difficult to come by, as it is offered through companies who are renovating your home. They typically come with lower loan limits and usually do not require you to use your home as collateral. However, if you do not repay the loan on time, the contractor could file a lien against your property.
How to Decide If a Home Equity Loan Is Right For You
Does a home equity loan require an appraisal? Yes, it does. Home equity loans can be a good option for homeowners who have the required amount of equity in their home. However, it might not be the right option for everyone. To decide whether it’s right for you, consider how much you want to borrow and what you want to use the funds for. Then, compare home equity loans and the alternatives to see which best fits your needs.
Frequently Asked Questions
Do all home equity loans require an appraisal?
Yes, all home equity loans require an appraisal. However, some might not require a full appraisal.
What do appraisers look at for a home equity loan?
It depends on the appraisal type, but generally, they assess the home’s condition and features.
Who pays for the appraisal on a home equity loan?
The homeowner pays for the appraisal.