Do I need to reappraise my home to qualify for a HELOC?

While you've been focused on everything else life throws at you, your property has been working behind the scenes. Most people build equity as they pay down their mortgage and property values rise. Meanwhile, big expenses come up from time to time. 

Under the right circumstances, a home equity line of credit could help you reach your financial goals. A HELOC is a mortgage. The process may differ slightly from what you went through to get your first mortgage, but some elements remain the same. For example, your lender will want to confirm the value of your home. Here’s how appraisals work for a HELOC.

Do you need a home appraisal to qualify for a HELOC or home equity loan?

Short answer, yes. Lenders typically require a HELOC appraisal. An appraisal is also a home equity loan requirement. (A home equity loan is a one-time loan, and a HELOC is a line of credit.) An appraisal tells the lender what your house is currently worth. 

Sometimes an appraisal is done by a professional appraiser who comes to your house. Other times, the lender uses a digital method that could streamline the approval process, possibly saving you time and money.

The reason for the appraisal is that lenders want to know the true value of your home. That’s the starting point for figuring out how much home equity you have, and how much you might qualify to borrow.

How does home equity work?

Equity is what’s left after subtracting your mortgage balance from the fair market value of your house. 

Typically, HELOC and home equity loan lenders limit the amount you can borrow to a certain percentage of your home’s value. This ratio is called combined loan-to-value. It’s your mortgage balance plus the new loan you want, divided by your home’s value. When you have equity, it could mean that you have some room to borrow against your home.

What kind of appraisal is required to get a HELOC?

Lenders require either a traditional in-person appraisal or an AVM appraisal.

With a traditional appraisal, someone comes to your house, looks at the property's condition, and compares your property to recently sold homes in the neighborhood. 

An in-home physical appraisal isn't always required. Some lenders, including Achieve Loans, use an Automated Valuation Model (AVM) for a digital appraisal. 

An AVM appraisal uses software to estimate your home's fair market value by looking at different data points. Typically, these include market trends and recent sales. This data paints a fairly clear picture of how much your home could sell for. The AVM appraisal and your mortgage balance tell the lender how much home equity you have.

How much does a HELOC appraisal cost?

The cost of a HELOC appraisal varies depending on the method. Paying an appraiser to come to your house could cost several hundred dollars.

With an AVM, the costs are much lower. Achieve Loans doesn’t charge a fee for your AVM when you apply for a HELOC. 

Can you get a HELOC without an in-person appraisal?

It’s possible to get a HELOC or a home equity loan without an in-person appraisal. You can do this if you work with a lender that uses an Automated Valuation Model (AVM). The software will determine your home's value based on statistics and market trends: no in-person visit needed.

What happens if your home appraises for less than expected?

If your home appraises for less than expected, that could mean that you have less equity than you thought. It could mean that your loan limit will be lower. It’s possible you may not have enough equity to borrow at all. 

You'll need to know your lender's maximum combined loan-to-value requirements to understand the impact of a low appraisal. 

How the appraisal relates to your HELOC loan limit

Many HELOC lenders allow you to borrow up to 80-85% of what your home is worth. This figure includes all debt against the home. So, for most borrowers, we’re talking about your current mortgage balance plus the new loan you want. If the lender’s CLTV limit is 85%, then together, your mortgage and HELOC can’t equal more than 85% of your home’s appraised value.

You calculate the CLTV by adding up your mortgage balance and the new HELOC or home equity loan. Divide that by your home’s current value, and multiply by 100. Here’s an example:

• Appraised value: $500,000

• Mortgage balance: $275,000

• HELOC you want: $150,000

150,000 + 275,000 = 425,000

425,000 / 500,000 = 0.85 or 85%

With this HELOC, your combined mortgage debt would be $425,000. That’s 85% of your home’s appraised value. If that’s the same as your lender’s CLTV limit, this is a HELOC you could apply for.

If your home appraises at $485,000 and the lender’s CLTV limit is 85%, your HELOC limit would be $137,250.

Even if your home doesn't appraise for quite as much as you hoped, you might still have enough equity to qualify for a HELOC or home equity loan that meets your needs.  

Will the HELOC appraisal process slow things down?

The HELOC appraisal could draw out the process if you need an in-person appraisal. When lenders like Achieve Loans use the AVM model, you usually won’t need to wait long at all to find out your home's value and move forward with the loan process.

Achieve Loans can offer quick closings with HELOCs or home equity loans precisely because of the all-digital appraisal model. 

What’s next? 

Now you know the answer to whether you need a home appraisal for a HELOC. It’s time to take the next steps in being able to use your equity: 

• Jot down your mortgage balance

• Research your home’s value by looking at comparable sales on real estate websites

• Estimate how much equity you have

• Assess your financial needs and determine how much you need to borrow to accomplish your goals 

• Talk with a loan officer about your borrowing options. There are other requirements besides equity to qualify for a HELOC.