Your Path to Real Estate Valuations for Home Equity Loans
If you are hoping to get some cash in order to fund a home improvement project, cover an emergency expense, consolidate debt, or just get a financial reprieve then a home equity loan may be a good option. The average homeowner may have more equity than they think and these funds can help with financial goals.
However, in order to begin this process, you will need to know how much equity you actually have in your home. To get a rough idea, you can do your own quick calculation by using a formula and takes your home value and subtracts your current mortgage balance. Keep in mind that most lenders will let you borrow only up to 85% of that equity. Even if you have equity in your home, you will still need a real estate valuation, often in the form of an appraisal for home equity loans.
In order to get the most accurate home value, the appraisal is going to be done by an independent appraiser. This is for fairness and accuracy. If you were to appraise your own property then you would be on the high side so you are able to get a bigger loan. The bank would have a reason to lower your appraisal in order to lend less. This process makes it the most fair.
Are Real Estate Valuations Required for Home Equity Loans?
A lender that relies on other methods for establishing the property value may not require a full property appraisal. However, in most cases, it will be required. Lenders may use county assessment records or automated valuation models in order to find a comparable price for your current home. If this is the case then it may allow you to reduce your closing costs when getting home equity loans.
You may not need an appraisal if there has been an appraisal completed within the past 180 days that the lender can review, a very low loan-to-value percentage is requested, you are getting a home equity loan from the lender who has your first mortgage, or an alternative system is used. If a full appraisal is required then the lender may allow you to roll the cost into the loan or include it with other fees. Usually, the cost of third-party services, such as an appraisal, have been accounted for in the loan process, whether it’s going to be included in the fees or you have to pay out of pocket for it.
How Does an Appraisal Work for a Home Equity Loan?
Home equity loans, as well as home equity lines of credit, will usually require the same data in order to underwrite as a typical mortgage loan. However, a primary mortgage loan will definitely require a full appraisal in order to meet the lending guidelines that are established by private investors or government agencies. Home equity loans aren’t subject to these same guidelines.
In either case, the lender does need to establish a value and use some form of sales comparison approach. Unlike with primary mortgages, lenders for home equity loans have more leeway in deciding how they want to do this comparison. A lesser appraisal requirement may lower the amount of time it will take to close on a home equity loan instead of a standard mortgage.
Full Appraisal
During a full appraisal, a licensed appraiser comes to your property to take pictures and measurements and looks at the inside of the home for any defects. Then the appraiser produces a report and compares your property with recent sales of other similar properties in the area. Depending on where your property is located, this process can cost you between $400 and $800.
Desktop Appraisal
This may also be called a desk review and this type of appraisal just relies on property value data that is received from market data and county records in order to check market value. While the cost of this type of appraisal will vary from lender to lender, it will usually be one of the cheapest options. If the lender isn’t covering the cost, the cost ranges from $50 to $150. This can almost be considered a house appraisal online.
Exterior Only/Partial Appraisal
This appraisal may also be called a drive-by appraisal and will have the appraiser only looking at the exterior of the home. There will still be a report and the report compares your home with other properties that have been sold in the area, but the cost ranges from $250 to $400. In order to get the most valuable result for this appraisal, it’s best to boost your curb appeal by planting flowers or trimming hedges.
Tax Equalized Value
The county tax assessor will set an assessed value based on the market value of the property. The value is then adjusted so that it is set at the right taxation level for the area. Lenders may use this information and then work backward in order to look at the estimated market value and charge the same as the desk review fee.
Calculating Your Home Equity Stake from Your Appraised Value
Once you get the appraised value on your home, the lender will determine how much you are able to borrow. The amount of equity that you are allowed to borrow will be determined by the permitted loan-to-value (LTV) percentage by the lender. Many will go up to 80% and 90% but you may even find a lender that is willing to go up to 100%. In order to know how much you can borrow against the home, you need to look at the current home equity stake. The formula for this is:
HOME VALUE - DEBTS = HOME EQUITY
If you have a home that is valued at $500,000 and the balance on your mortgage is $250,000 then there is an equity stake in the property of $250,000. Then, in order to figure out how much you can borrow, you will need to know the permitted LTV. You can find available equity with the formula that equity equals home value times LTV%, minus debts. For example, if the home is valued at $450,000 and you can draw 90% then the maximum loan amount is going to be $405,000, and if you subtract a mortgage of $250,000 then you are able to get $155,000.
How to Maximize the Home’s Appraised Value
If you need to undergo a full appraisal, note that the appraiser is going to enter the property in order to look at the condition. You want the appraisal to come in as high as possible if you want to borrow more. In order to maximize the appraised value, it is in your best interest to improve the appearance of your home by taking some steps.
Be sure to perform any maintenance tasks, such as cleaning and decluttering, and other routine tasks in order to get your home ready. The appraiser is going to take photos during the evaluation and put them in the report. It may be as simple as repairing minor visual defects or it can be as involved as a new paint job.
You are likely to know your neighborhood better than anyone so look up some information on recent sales and show the most favorable ones to the appraiser. Hopefully, they will include some or all of your research as comps in the report.
It can be difficult for an appraiser to see what improvements have been made by just looking at the home. If you have put in a half bath upstairs, installed a new deck, or renovated the kitchen then let the appraiser know, as well as how much it cost.
Since you live in your home you will be the best resource for factual knowledge about the home. Be sure to brush up on the details and make sure you are prepared so that you can fill in the appraiser with the most accurate information.
If you maximize the appraised value of your home then you may be able to increase the amount you are able to borrow. The combined loan-to-value ratio and appraisal value can play a role in the terms you qualify for and the interest rate. If can even play a role in determining the rate you get on your primary mortgage, if you think of refinancing the property.
Regardless of whether or not you will use the maximum amount of equity, more equity is going to be better than less. When an appraiser is evaluating the property, they will gather a lot of information about the home in order to compare it with similar properties in the area. Details about the condition, construction quality, age of the property, and square footage are going to be noted in the appraisal report and can have an impact on the value. You want to double-check this information in the appraisal report when it is completed.
What Should You Do if the Appraisal Is Too Low?
If your appraisal comes back with too low a value then you may be able to challenge the report with a rebuttal process. However, appraisals are opinions of value so there isn’t going to be a guarantee that you are going to be able to change the outcome.
Start by reading the report thoroughly and see if you notice any material errors, such as the number of bathrooms and bedrooms, lot size, or square footage. Review comparable properties that were used to see if you are able to find better ones, such as those that are closer in age, quality, and proximity to your property than the ones used in the report.
Decide which areas of the report you want to have reconsidered and provide any supporting information that you are able to find to justify your request. Be prepared that most rebuttals aren’t going to result in changes.
It’s Not Forever!
However, keep in mind that just because you have a low appraisal doesn’t mean that you are going to be stuck with that value forever. Appraisals are usually only considered valid for up to 180 days so it’s possible that you can restart the process and give your home more of a chance to appreciate in value.
However, keep in mind that just because you have a low appraisal doesn’t mean that you are going to be stuck with that value forever. Appraisals are usually only considered valid for up to 180 days so it’s possible that you can restart the process and give your home more of a chance to appreciate in value.
Preparing for an Appraisal
In order to prevent too low an appraisal, there is a lot that can be done to your home. You already know you should prepare your home to look its best but what does that mean?
Deep Clean the Home
Act like you would be if you were showing your home to buyers. Make sure you are dealing with any pets and pests.
Secure Your Pets
This is basic courtesy during the process and you want the appraiser to be able to work more efficiently, even if the appraiser is a pet person.
Clean up the Yard
You don’t need to get too fancy with this but make sure the front of the home looks tidy and nice. Mow the lawn, pull weeds, brush cobwebs, and clear debris and leaves. Appraisers will take into account the curb appeal when it comes to the final value.
Touch up the Paint
Appraisers factor peeling paint into the evaluation. If you aren’t sure what color paint you have for touchups then you can take a small swatch from the wall and be able to color match it at a hardware or paint store.
Don’t Run the Sprinklers or Water the Lawn
This only applies to when the appraiser is scheduled to view your home. Appraisers don’t want to track mud in the home but will need to walk around the home outside in order to get measurements.
What Happens During the Appraisal?
During the appraisal, nearly all appraisers will use the same form. The form will have specific questions about the demographics in the neighborhood, housing trends, property condition, available utilities, measurements about the home, and how the home looks and fits into the neighborhood.
Beware Of
In addition to paying attention to any upgrades, the appraisers also look at the home age, location, structure, property, roof, parking, exterior condition, construction quality, and neighborhood. Internally, the appraiser will pay attention to the functional layout, square footage, size of the kitchen, size and number of bathrooms and bedrooms, safety accouterments, appliances, condition, code compliance, and structural integrity. While upgrades are considered, they will usually just look more at the basics of the home since the goal is to see how the home compares to other properties.
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Your Role
The process can take anywhere from 15 minutes to several hours, depending on your home. You aren’t required to leave but you may not want to stay in the home so you aren’t in the way for any measurements or photos. You are allowed to stay there but it could make the appraiser’s job a little bit harder. There are a lot of things for the appraiser to note and look at and if you are chatty then it can distract the appraiser from noticing the important things. You can provide complete information ahead of time if the appraisers ask for it.
What Happens after the Appraisal?
After the process is done, you may be anxious to find out more about the value of your home. The appraisal report should come back in about a week but it can also take 10 days. The appraiser may need some time to check for permits and make sure the information on the report is correct.
If you need the appraisal to come back sooner then you want to make sure someone is in contact with the appraiser to get questions answered. The report will be about 10 pages or less, although some can be a lot longer. After you get it back is when you are able to challenge a low appraisal if you want.
What Is a Home Equity Evaluation?
A home equity evaluation is slightly different than an appraisal and it’s a report that is created by local real estate agents that compare homes in the same price range and neighborhood. The price is only meant to provide the fair market value of the home. Sellers and buyers can use this information when going through the buying and selling process to know what to ask for and what can constitute an acceptable offer.
Why Choose Appraisal Instead?
An appraisal is going to be important if you want to get a home equity loan since the lender is going to want to make sure that they aren’t going to be lending you more money than your home is worth. An appraisal will have more authority than a home equity evaluation and may be required, depending on your financial institution. If you are looking to get an estimate and not an actual value then you can consider a home equity evaluation.
To Sum Up,
Home equity loans can be an important financial tool but it’s important that you know how much home equity is built up in your home. A real estate valuation in the form of an appraisal is usually needed to get a home equity loan. While the process is pretty straightforward, there are things you can do to make the process smoother and try to increase the value of your home.