Do You Need an Appraisal for a Home Equity Loan?

A home equity loan borrows against your current equity—which is how much of your property you truly own. The amount of your equity determines how much you’re able to borrow, and the current value of your home (which is typically determined by appraisal) is one of two factors in calculating your equity. 

So, do you need an appraisal for a home equity loan? The short answer is: Usually.

Let’s dive into the specifics to understand when and why appraisals are necessary.

Do I Need an Appraisal for a Home Equity Loan? Understanding Requirements

Whether or not you need an appraisal to take out a home equity line on your specific property depends on the amount of your equity, the loan amount you’re trying to borrow, and each lender’s loan guidelines.

Loan-to-Value Ratio Thresholds

Let’s say your fully owned home is assessed at $400,000 for property tax purposes and you live in a highly desirable neighborhood. Property tax assessments tend to run low, so it’s appropriate to anticipate a formal appraisal would come back at more than $400,000. 

Suppose you apply for a $50,000 home equity loan, and your credit qualifications are excellent. In that case, a lender may simply run a quick computer-based valuation so they can check that item off their list before giving you a check and a smile. 

This is based on your combined loan-to-value (CLTV) ratio: a measurement of how much you borrow as your loan amount compared to the market value of the real estate property. To calculate it, divide your total property debt (the home equity loan you’re applying for plus your current mortgage and any other liens against your home) by property value. 

In the example above, CLTV ratio would be 12.5%:

50,000 ÷ 400,000 = 0.125

Most lenders set a maximum CLTV ratio of 80% – 85%, so this application easily qualifies without a full appraisal.¹

In another example, Edie bought a $300,000 piece of real estate three years ago with a 20% downpayment ($60,000) and wants to borrow $15,000. If you used the three-year-old sale price as home value, that would put her CLTV ratio at 85%: 

(240,000 + 15,000) ÷ 300,000 = 0.85

A walk-through appraisal, however, shows her home has increased in market value by 29% since its purchase. This changes their CLTV ratio to 66%:

(240,000 + 15,000) ÷ (300,000 * 1.29) = 0.66

The results of the appraisal allow Edie to proceed with her $15,000 home equity loan. 

Specific Lender Requirements

While 80% – 85% CLTV ratio is common, each lender sets their own limits.¹ 

It’s possible to borrow a larger slice with a subset of lenders that permit high ratio loans, but you’ll pay for the privilege. Loans with a CLTV ratio of 90% or more usually: 

• Incur higher interest rates
• Require private mortgage insurance (PMI) paid by the borrower
• May include additional fees and limitations

Types of Appraisals and Valuations

An appraisal is a process of objectively and professionally determining the amount of money your home would currently sell for. It’s done by a licensed professional who is an independent party not affiliated with either the lender or borrower.

Appraisals include: 

• Analyzing recent sale prices of nearby, comparable homes
• Taking market conditions and value fluctuations into account
• Adjusting final value to reflect your home’s unique condition and features

There are different levels of a home appraisal: 

• Walk-through covering both interior and exterior²
• Drive-by with no interior visit
• Desktop utilizing site photos and detailed floor plans³
• Computer-based automated valuation models (AVMs) that analyze public data

What Is the Home Appraisal Process for a Home Equity Loan?

A home equity loan may be pre-approved based on the data on your application, including what you currently owe on a mortgage (or mortgages) and your own property value estimate. 

For final approval, the lender must be satisfied with the home valuation. The loan officer will decide whether the value can be assigned for the purpose of this loan by a formal walk-through, a quick AVM result, or something in between. 

If a professional appraiser is engaged, they’ll be selected by the lender and then schedule directly with the homeowner if a site visit is required.

A walk-through appraisal includes a site visit of one to several hours.⁴ Between scheduling and generating the report, the final appraisal may take a few weeks. An AVM, on the other hand, can be done instantly.

A Debt-Free Home Equity Loan Alternative

If you’re measuring options to leverage your home equity for cash, have you considered a sell and stay transaction? 

Rather than borrowing against your equity, a sell and stay transaction from Truehold combines a property sale with a lease agreement. You’ll: 

• Unlock your home equity
• Stop paying property tax and property insurance
• Have someone else handle essential repairs
• Continue living at home as a renter 

If you’re ready to learn more, give us a call today. A Truehold representative will reach out to discuss whether Truehold's sell and stay transaction is a good fit for you.

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Sources: 

1. Bankrate. Requirements for a home equity loan or HELOC in 2023. https://www.bankrate.com/home-equity/requirements-to-borrow-from-home-equity/

2. Kairos. Understanding the Different Types of Home Appraisals. https://kairosappraisal.com/different-home-appraisal-types/

3. CostHelper. How Much Does a Property Appraisal Cost? https://personalfinance.costhelper.com/property-appraisers.html

4. LendEDU. What Is the Appraisal Process for Home Equity Loans and Lines of Credit? https://lendedu.com/blog/appraisal-home-equity-loans-and-lines-of-credit/