Home Equity Loans: Do They Require an Appraisal?

Due to fluctuations in the housing market, the value of your home is likely always changing. Depending on how long ago you purchased it, the price you paid may be drastically different from what it is worth now.

To best determine the present value of your home while taking a wide number of factors into consideration, it is necessary to have a home appraisal performed. This is an unbiased estimate of the property’s value conducted by a licensed or certified appraiser.

In order to form this estimate, the appraiser must visit your property and go through several important steps as they formulate their evaluation.

In most cases, one of the first things that the appraiser will do is inspect the property to determine its condition, size, layout, and any unique features. During this inspection, they will compile a collection of photographs, measurements, and notes.

Next, it is necessary for the appraiser to do some thorough research into comparable properties (comps) in the area that have either recently sold or are currently on the market, focusing specifically on properties of a similar size, age, location, and condition.

The appraiser can then use a combination of the data they gathered during their inspection and the information they gleaned from their market analysis to determine an estimated value of the property.

Is a home appraisal necessary to secure a home equity loan?

If you are interested in tapping into the equity that you have amassed in your home as you have paid off your primary mortgage over time, applying for a home equity loan is the best way to do that.

A home equity loan can free up a significant amount of cash, which you can leverage for various reasons, such as consolidating debt, paying for home renovations, or funding a university/college education.

In order to secure such a loan, though, there are certain hurdles that you must first overcome, such as a home appraisal. Similarly to when you first purchased your home, it is standard for a home equity loan process to involve an appraisal of the property’s value.

After all, the amount your home is worth is a major factor in determining the size of the loan you are eligible for.

For a lender to assess the maximum amount they can loan you, they must multiply your home’s current value by 80%, as this is the combined maximum allowance for a mortgage loan that you can obtain according to Canadian laws. Then, they will subtract this figure from the owing amount you have remaining on your primary mortgage.

Are there alternative ways to determine the value of your home when applying for a home equity loan?

Most traditional lenders will require that you have a professional appraisal done to determine the market value of your home so they can ensure that the loan amount matches up with your property’s worth and their risk tolerance.

That being said, if you choose a less traditional lender when applying for a home equity loan, they may be willing to accept an alternative means of determining your home’s value without a complete appraisal process. However, such alternatives may come with limitations or conditions that are crucial to understand.

The following are some of the potential alternative ways of assessing your home’s value that a lender could accept:

1. An automated valuation model

Certain lenders may use an automated valuation model (AVM) to estimate your property's value, which uses data algorithms and an analysis of public records to generate this conclusion.

Although AVMs are much faster than traditional home appraisals (and less expensive), they may not be as accurate. Thus, the estimate generated by this type of model could end up being much lower or higher than your home’s actual value, which could lead to various issues with your home equity lending process.

2. A desktop appraisal

Another method that a lender may accept is a desktop appraisal. This process still requires that you hire a professional appraiser. However, the main difference is that they do not actually visit your property to conduct a physical inspection. Rather, as a part of this process, the appraiser will use photographs, data, and other information to remotely assess the value of your property.

Although this option is faster and cheaper than a full traditional appraisal, desktop appraisals are also susceptible to evaluation errors since they are nowhere near as comprehensive and could miss out on some of the nuances of your property.

3. Loan-to-value ratio

Instead of a full appraisal, some lenders may be okay with relying on a determination of the loan-to-value ratio instead. This is the ratio of a loan to the value of the asset purchased. To determine that value, various means can be used, such as tax assessments or recent purchase prices.

Yet again, while this method may simplify the process of determining your home’s value, it leaves a lot of room for important factors to be left out and should thus be used cautiously.

How Canadalend Can Help You Secure a Home Equity Loan

Whether you would like to consolidate debt, purchase a new home, start a home renovation project, or put your kids through school, gaining access to the significant chunk of money that a home equity loan can amount to can certainly help you meet your goals. Fortunately, Canadalend can assist you along the way.

Our team of licensed mortgage professionals understands that the process of applying for such a loan can often be rather overwhelming, which is why we are here to help you every step of the way.

We would be happy to answer your questions or concerns about the process, and could offer you some advice that is tailored to your personal financial situation and goals. We offer a range of financial solutions that are sure to suit your needs and will work with you to ensure you get the best rate for your home equity loan.

We are dedicated to top-quality customer service, which is why we even offer free personal consultations. If you want to secure a home equity loan without having to face all the challenges of this process on your own, our services are the answer.

For more information on how we can help you secure a home equity loan, or to learn about the requirements we have for home equity loans, call Canadalend at 1-844-586-0713 or contact us here.