Do You Need an Appraisal for a HELOC or Home Equity Loan?

Home equity loans and HELOCs typically require a home appraisal before funds can be released. This appraisal helps determine the amount you can borrow and the riskiness for the lender to recoup the money it lends you if repayment isn’t made.

However, not all appraisals are the same. We’ll explain the differences and how each works.

When and why is an appraisal required for a HELOC or home equity loan?

Formal appraisals by qualified appraisers aren’t always required for HELOCs or home equity loans, they often are, especially if the borrower is seeking a large loan amount or has little equity in the property. 

You can expect lenders to always value your home using some type of valuation method, even if a formal appraisal isn’t required. For instance, the lender may use a computer-driven automated valuation method (AVM) versus an appraisal. 

A formal appraisal might be required depending on:

• Your loan amount
• Risk assessment
• Regulatory requirements

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Loan amount 

If the borrower is seeking a large amount of money (e.g., more than $400,000), the lender may require a formal appraisal versus another type of valuation. The lender must ensure the home’s value is enough to cover the loan in case of default, which an appraisal helps establish.

Risk assessment 

Lenders use appraisals to assess the risk associated with lending against the property. The appraisal offers an independent, expert opinion by a licensed or certified appraiser of the property’s current market value, including its condition, location, and comparable sales in the area. 

A higher appraised value reduces the lender’s risk, and a lower value may result in a lower loan amount or even denial of the loan.

Regulatory requirements

Regulations may mandate a formal appraisal for HELOCs or home equity loans above a certain threshold. This ensures that lenders adhere to responsible lending practices and accurately assess the value of the collateral securing the loan.

The lender decides whether an appraisal is required based on their internal policies, regulatory requirements, and the specific circumstances of the borrower’s loan application. 

Appraisals provide lenders with critical information about the property’s value, allowing them to make informed decisions regarding loan amounts, interest rates, and terms.

How does the home equity loan and HELOC appraisal process work?

When applying for a HELOC or home equity loan, the appraisal process plays a critical role in determining the value of your property, which in turn affects the amount you can borrow. 

Here’s how the appraisal process typically unfolds in four steps:

Step 1: Get conditional approval

Before the appraisal, HELOC and home equity loan requirements mean you must apply for the loan and get conditional approval from the lender. This involves providing information about your income, credit history, current debts, and the loan amount. 

Conditional approval indicates that the lender will likely approve your loan pending the appraisal results.

Step 2: Discuss the appraisal with your lender

Once conditionally approved, your lender will discuss the appraisal process with you. It will explain why an appraisal is necessary, how it influences the approval process, and any associated costs.

Step 3: Prepare for the home appraisal

Before the scheduled appraisal, prepare your home to showcase its best features. This may include decluttering, making minor repairs, and ensuring key areas, such as kitchens, bathrooms, and curb appeal, are well-maintained. 

The appraiser will assess your property’s condition, size, layout, and upgrades or renovations you made.

Step 4: Check the results

Once the appraisal is complete, the appraiser will provide a report detailing their findings, including the home’s appraised value. You are entitled to a copy of the appraisal, so don’t hesitate to ask your lender for one. 

The appraiser will send the formal appraisal report to the lender for review. If the appraised value meets the lender’s requirements and aligns with the loan amount you’re seeking, your loan will likely proceed to final approval. 

However, if the appraised value is lower than expected, you may need to adjust your loan amount or reconsider your borrowing options.

Types of home appraisals for HELOCs and home equity loans 

When considering a HELOC or home equity loan, it is essential to understand the valuation methods lenders use to determine your home’s value. These valuations help lenders assess the amount of credit they can offer based on your home’s equity. 

It’s important to distinguish between a formal appraisal and other valuation methods. Qualified appraisers must prepare appraisals, and lenders sometimes also use non-appraiser-prepared valuation methods, such as the AVM.

An AVM is a cost-effective approach to valuing your home and is much faster than a formal appraisal. We’ve included AVMs in our analysis because they’re valuations many lenders use. 

Type of valuation or appraisal	What it is
Automated valuation method (AVM)	Uses computer algorithms to estimate your home’s value as an alternative to a traditional appraisal
Desktop	Data-driven appraisal requiring no physical visit to your home or inspection
Drive-by	Limited appraisal developed on a review of data and the exterior condition of your home
Full walkthrough	Full appraisal based on a review of available data and your home’s exterior and interior condition

Is an AVM an appraisal for a HELOC or home equity loan?

The AVM utilizes computer algorithms to estimate your home’s value, offering an alternative to traditional appraisals. An AVM is not an appraisal but an alternative valuation method lenders commonly use.

AVMs pull data from various sources, including public property records, recent sales, and price trends, to generate a quick property value estimate at a lower cost than a formal appraisal. However, AVMs may be less accurate, particularly if your home is unique. 

Pros and cons of an AVM

Consider the following.

Pros

• Quick to complete and cost-effective

• Require no physical inspections

Cons

• May not be 100% accurate

• Limited by the quality and availability of public data

What is a desktop appraisal for a HELOC or home equity loan?

A desktop appraisal is a valuation method in which the appraiser does not visit the property. Instead, it relies on online resources, previous appraisals, public records, and MLS data to estimate its value.

Though quick and cost-effective, because the development is mainly data-driven with no physical inspection, it may be less accurate than a full appraisal. 

Pros and cons

Here are the pros and cons of a desktop appraisal.

Pros

• Cost- and time-efficient

• Convenient (no physical viewing)

• Leverages extensive databases, including public records and MLS listings

Cons

• May not include all your home’s features

• Potential for oversights

• Less personalized assessment

• Can miss recent market trends

What is a drive-by appraisal for a HELOC or home equity loan?

A drive-by appraisal (aka exterior-only appraisal) involves an appraiser inspecting the property’s exterior and neighborhood without entering the home to aid in valuation.

Pros and cons

These are the benefits and downsides of a drive-by appraisal.

Pros

• Faster than a full appraisal

• Cost-effective

• Less intrusive

• Flexible scheduling

Cons

• Excludes your home’s interior condition

• Potential for inaccuracy

• Limited data collection

• Not suitable for all lending situations

What is a full walkthrough for a HELOC or home equity loan?

This is the most comprehensive type of appraisal, in which a qualified appraiser inspects the interior and exterior of a property, takes measurements, and evaluates its condition and features to determine its value.

Pros and cons

If your lender wants a full walkthrough, consider these pros and cons.

Pros

• Most accurate valuation

• Thorough review of your home

• Customized insights

• Often considered the gold standard

Cons

• Can be expensive

• May be time-consuming

• Requires homeowner preparation

• Intrusive process

When is an appraisal ordered in the home equity loan process? 

An appraisal is a critical step in the lending process, often ordered after the initial application and approval for a home equity loan or HELOC. The timing can vary depending on the lender, but it generally occurs early to ensure the loan amount doesn’t exceed the home’s value.

Once a borrower provides a loan application and necessary documentation, the lender reviews this information to determine preliminary approval. If the application meets the initial approval criteria, the lender orders the appraisal to evaluate the home’s current market value. 

This appraisal is usually ordered within a week of preliminary approval, but the timeline can vary. The completion timeline ranges from a few days to several weeks. 

Factors influencing the appraisal completion timeline include the following: 

• Appraiser’s availability
• Property type 
• Location 

Lenders often have a deadline, often 30 to 45 days from the application, by which the appraisal and other loan processing steps must be completed. Borrowers are notified when the appraisal is ordered—by the lender or via updates in their loan application portal. 

It’s wise to expect to provide access to your property, along with information about your home’s features and any improvements.

Who pays for the appraisal on a home equity loan or HELOC?

Typically, the borrower pays for the appraisal cost in a home equity loan or HELOC process. This fee is often paid upfront at the time of the appraisal order or included in the closing costs when the loan is finalized. 

Payment methods can vary. Applicants might pay through direct billing from the appraisal company, via check, or through electronic payment methods arranged by the lender. 

Sometimes, you can roll the fee into the loan amount and finance the appraisal cost. This depends on the lender’s policies and the loan’s terms. 

What do appraisers look at?

During an appraisal for a home equity loan or HELOC, appraisers evaluate the property to determine its current market value. They focus on several aspects:

• Physical condition: Appraisers assess the property’s condition, including the age, construction quality, and any signs of wear or structural damage. They examine the roof, foundation, walls, flooring, and other structural elements.
• Size and layout: The size of the land and home, including the number of bedrooms and bathrooms, living areas, and any additional spaces, such as basements or attics, are evaluated. The layout’s functionality and flow also play a role in the valuation.
• Improvements and upgrades: Recent renovations or upgrades enhancing the home’s value, such as updated kitchens, bathrooms, or energy-efficient systems, are considered.
• Location: The property’s location, including the neighborhood, proximity to amenities, schools, and employment centers, and any location-specific risks (for example, flood zones), influences its market value.
• Comparables: Appraisers examine recent sales of similar properties in the area to help determine a home’s market value. These “comps” provide a context for pricing in the local market.

Appraisers’ findings assure lenders that the property’s value supports the loan amount, mitigating their risk in the lending process.

How to prepare for a home appraisal for a home equity loan or HELOC

Preparing for a home appraisal is crucial in securing a home equity loan or HELOC. Here are vital steps to ensure your property is assessed at its highest potential value, regardless of the appraisal type:

• Tidy up: First impressions matter. Clean and declutter your home to make it appear well-maintained and spacious. A neat exterior and interior can influence the appraiser’s positive perception.
• Document improvements: Compile a list of all upgrades and improvements made to the property, with dates and costs, if possible. Significant renovations, such as kitchen remodels or added rooms, can increase your home’s value.
• Address minor repairs: Fix noticeable issues, such as leaky faucets, missing door handles, or cracked windows. Minor defects can suggest to the appraiser that there might be more significant problems.
• Enhance curb appeal: The home’s exterior is just as important. Mow the lawn, trim hedges, and consider adding potted plants to enhance the property’s appeal.
• Know your market: Understanding recent sales of similar properties in your area can help you gauge your home’s potential value. Being informed can help you set realistic expectations.

These steps can help you showcase your home in the best possible light and maximize its appraisal value. 

What if I disagree with my HELOC appraisal?

Much rides on your home appraisal, and of course, you want it to be accurate—but that isn’t always what happens. In particular, systemic racial basis and discrimination are concerns. 

Ask your lender for a copy of the report. Go through it and identify where you disagree. For example, maybe it didn’t include accurate comps or significant improvements you’ve made. 

Gather evidence to support your case and take it to your lender. Your lender may ask the appraiser to reconsider the report. You can also ask your lender for a second appraisal, but the lender isn’t required to do so. 

If you’re still unhappy with the outcome, consider hiring an attorney and report any violations or unfair practices to the authorities for investigation. Authorities include:

• Your state’s appraisal board
• Your local fair housing agency
• Appraisal Complaint National Hotline
• Office of the Comptroller of the Currency
• Department of Housing and Urban Development