Do you need an appraisal 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 type of mortgage called a home equity line of credit (HELOC) could help you reach your financial goals. A HELOC is a credit line that uses your home as collateral, meaning your home backs up the loan. As part of the approval process, lenders will want to check the current market value of your property.

How HELOC appraisals work can vary depending on the valuation process your lender uses. Let's take a look at when you'll need an appraisal to get a HELOC.

Do you need a home appraisal to qualify for a HELOC?

Short answer, yes. Lenders typically require a current valuation for a HELOC. Some exceptions exist, but they’re rare. An appraisal tells the lender what your house is worth on the open market right now.

Sometimes a professional appraiser comes to your house to do the appraisal in person. Lenders may also use a digital valuation method that could streamline the approval process, possibly saving you time and money.

The reason for the HELOC appraisal is to determine 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 using that equity as collateral.

Typically, HELOC lenders limit the amount you can borrow to a certain percentage of your home’s value. This ratio is called combined loan-to-value (CLTV). It compares the total balance of all loans secured by your home—including your mortgage and any home equity loans or HELOCs—to your home’s value.

What kind of appraisal is required to get a HELOC?

Lenders require either a traditional in-person appraisal or an automated valuation model (AVM)  appraisal. Here’s the difference between the two methods:

• Traditional appraisal. Someone comes to your house, looks at the property's condition, and compares your property to recently sold homes in your neighborhood. 

• AVM 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 automated valuation model is not technically the same thing as an appraisal, but it does provide similar information. An AVM gives a lender a good idea of your home’s value, a necessary piece of the puzzle that helps a lender determine how much equity is in your property. Some lenders, including Achieve Loans, use an automated valuation model (AVM) rather than an in-person HELOC appraisal. 

Whether a lender orders an in-person appraisal or an AVM, some type of valuation of your property is almost always required. An appraisal not only protects the lender, but it also helps prevent you from borrowing more than your home is worth.

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

Often, yes, you can get a HELOC without an in-person appraisal. It’s far more common to get a HELOC without an in-person appraisal as lenders are more frequently using AVM software. The software will determine your home's value based on statistics and market trends: no in-person visit needed.

The following factors could play a part in which valuation a lender chooses:

• The amount of money you’re asking to borrow

• The characteristics of the property

• Your borrower profile 

How much does a HELOC appraisal cost?

The cost of a HELOC appraisal varies depending on the method. The average home appraisal in the U.S. ranges from $314 to $424, but may be more, depending on where you live. That fee is typically included in your closing costs.The costs of an AVM are much lower. Achieve Loans doesn’t charge a fee for your AVM when you apply for a HELOC. 

What happens if your home appraises for less than expected?

If your HELOC appraisal comes in lower than expected, it could mean you have less equity than you thought. It may lead to a lower loan limit on your HELOC. It’s also possible you may not have enough equity to borrow at all. 

It helps to know your lender's maximum CLTV requirements. You need to maintain a certain amount of equity in your home with the new loan. If your home value isn't as high as you expected, the amount you want to borrow could actually put you over the lender's CLTV limit.

How the appraisal relates to your HELOC loan limit

Many HELOC lenders allow you to borrow up to 80% to 90% of what your home is worth. This figure includes all debt secured by the home. So, for most borrowers, that means your current mortgage balance plus the new loan you want. 

If the lender’s CLTV limit is 85%, then your mortgage and HELOC together can’t equal more than 85% of your home’s appraised value.

Here’s how to calculate CLTV. Add up your mortgage balance and the new HELOC. Divide that by your home’s current value and multiply by 100 to express it as a percentage. 

Here’s an example: Let’s say your mortgage balance is $275,000 and you’d like a $150,000 HELOC. Your combined mortgage debt would be $425,000. The lender's max CLTV is 85%, so you would need your home to be worth at least:

$275,000 + $150,000 = $425,000

$425,000 / 0.85 = $500,000

As long as your home is valued at $500,000 or more, you could meet the lender's 85% CLTV qualification. However, if your home is appraised at $485,000 and the lender’s CLTV limit is 85%, you would only be able to borrow up to $137,250.

Even if your home doesn't come in for quite as high a valuation as you’d hoped, you might still have enough equity to qualify for a HELOC that meets your needs. 

Will the HELOC appraisal process slow things down?

Whether a HELOC appraisal will slow the process depends largely on the type of appraisal.

If you need an in-person appraisal, it could draw out the process. When lenders like Achieve Loans use the AVM model, you’ll typically find out your home's value relatively quickly and move forward.

Achieve Loans can offer quick closings with HELOCs precisely because of the all-digital appraisal model. In mere seconds or minutes, an AVM can pull data from various sources, including public property records, tax assessments, recent sales data, and market trends. In short, it eliminates the need for time-consuming manual data gathering and could speed things up.

What you can do before an in-person HELOC appraisal 

If a lender requires an in-person HELOC appraisal, you can take steps to help get the best possible outcome. They include:

• Look for even minor problems and make needed repairs.

• Clean every nook and cranny, including closets, so the appraiser can easily assess how much space the home offers.

• Increase curb appeal by ensuring the yard and home exterior are at their best.

• If you’re allowed to be present, point out any work you’ve done or new features you’ve added.

What’s next? 

Now that you know the answer to whether you need a home appraisal for a HELOC, it’s time to take the next steps.

• 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 

• Connect with a lender to learn about your borrowing options.