When applying for a home equity loan or HELOC, the lender requires an appraisal of the property to protect against the risk of default. This allows them to determine the amount that can be borrowed and also helps them assess the value of the home. Most of the time, a full valuation is not required, and a recent appraisal may be sufficient. However, if you're looking for a faster process, consider using a lender with a real-time home valuation tool, such as Discover's home equity loan AVM.
A lender generally restricts the amount you can borrow through a home equity loan to 85% of your home's equity. Electronic valuation is performed on the desk of a professional appraiser using public property records and other available third-party data. Just like you do with your regular mortgage, you pay off a home equity loan with equal monthly payments for a set period of time. Most importantly, having higher incomes or finding ways to increase that income before applying for a home equity loan will also improve your DTI ratio.
This fee can range from several hundred dollars (Discover Home Loans doesn't charge an appraisal fee). A hybrid evaluation, called an automatic evaluation, is somewhere in between an AVM and a walk-in evaluation. The requirements vary depending on the lender, but there are standard criteria that are needed to qualify for a HELOC or home equity loan. Home equity loans and HELOCs with bad credit will have higher interest rates and lower loan amounts, and may have shorter terms.
Christie Halbeisen, assistant vice president of mortgage sales at Teachers Federal Credit Union in New York, said that opting for an appraisal instead of an AVM “can be useful in demonstrating how much the value of your home has appreciated, especially if you have completed recent improvements or remodeling projects. Lenders use appraisals to help determine the value of your home and calculate the amount of capital on your property so they can set a loan limit. Whether you use a home equity loan or a HELOC to take advantage of the cash in your home, your lender will likely require an appraisal of your home. However, you may be able to qualify for a home equity loan if you have other sources of income, such as pension or retirement distributions, Social Security or long-term disability payments, rental income, or child or spousal support.
Subtract your outstanding mortgage balance from 75 percent of the value of the home to approximate the potential amount of your line of credit or home loan. Applying for a home equity loan or HELOC can be a wise decision if you need money to finance a home improvement project or consolidate high-interest debt.