The nature of a home equity loan makes it difficult to obtain one without an appraisal. After all, a lender can't tell how much equity you have in your property without knowing the accurate value. While you won't get away without some form of valuation, sometimes lenders use certain methods that spare you the expense of a full appraisal.
If you're qualifying for a home equity loan, you'll need some type of appraisal to confirm the current market value of your home, particularly if your current appraisal was performed more than six months ago. Although you may not need a full appraisal, you'll at least need a limited scope appraisal, which is streamlined and less costly.
Existing Appraisal Time Frame
While you won’t get a home equity loan without some form of valuation, you may not need a new appraisal. If the equity loan is with your existing lender and your initial mortgage is less than six months old, the lender will use the existing appraisal. Some lenders will even use an appraisal up to one year old, so check the requirements when you apply.
If you have a recent appraisal, but you’ve applied at a different lender, it will accept the report if the appraiser is on its approved list. If not, it will use one of its approved vendors to review and certify the appraisal. It’s not free, but it’s cheaper than getting a new full appraisal.
Limited Scope Appraisal
A limited scope appraisal is a less expensive option than a full appraisal. In fact, a number of banks only use limited appraisals on home equity loans, in many cases covering the cost for the borrower. These are exterior-only appraisals, or drive by appraisals for home equity loans.
The appraiser inspects the property from the outside and gathers information on comparable sales to determine a value. The value is often lower than a full appraisal, but not enough to make a significant dent in the equity.
Desktop Appraisal Model
Another valuation method utilized by lenders on home equity loans is a desktop appraisal or automated valuation model. The lender plugs the address into its software, which comes back with a value based on comparable sales. It will give a market value, a low value and a high value along with a confidence score.
The confidence score – low, medium or high – represents the likelihood that the market value is accurate. If the confidence score is high, the lender will accept the market value. If the confidence score is medium or low, it will accept the low value.
AVMs are good for homes with high equity, but likely won’t be useful in a scenario where an owner is trying to access as much equity as possible.
Tax Equalized Value
There are very few scenarios in which a lender will go through without an appraisal. If the borrower owns his home free or clear, the lender may do a tax equalized value. The lender will take the tax assessed value and the equalization rate used by your municipality. It will divide the assessed value by the equalization rate.
So if your assessed value is $150,000 and your equalization rate is 45 percent, divide 150,000 by 0.45 to get the tax equalized value of $333,333. The lender will use this as the appraised value to determine your equity.