Received a low home equity loan appraisal? Take these steps now
Borrowing from your home equity is one of the most affordable ways to access funding now. The interest rates for home equity loans and home equity lines of credit (HELOCs) typically run much lower than credit cards and personal loans. This makes them ideal for funding renovations, consolidating debt or covering education costs.
But unlike other loans, home equity borrowing requires an appraisal to determine how much you can access based on your home's current value. When this appraisal comes in lower than expected, it can limit your borrowing power and derail your plans.
Don't panic if you find yourself in this situation, however. We spoke to three industry professionals who shared their best advice for handling a low appraisal and increasing your borrowing options. Below, we'll break down what to do, precisely, should this happen to you.
Start by seeing what home equity loan interest rate you'd qualify for here.
What to do after receiving a low home equity loan appraisal
You might feel stuck when your home equity loan appraisal comes in low. But experts say this setback can be a great opportunity to understand your home's value and explore alternative solutions. Here's your four-step game plan for when you get a lower-than-anticipated home equity loan appraisal:
Carefully review the appraisal
"It can be surprising how often there are discrepancies, missed upgrades or excluded comparable homes," says Jay Sobo, president of Liberty Financing LLC. "Appraisers are only human and can make mistakes, and as independent contractors, they often have minimal supervision." So, look at all the details about your property. Debbie Calixto, sales manager at mortgage lender loanDepot, recommends checking:
- Your home's square footage
- Your lot size
- The number of bedrooms and bathrooms you have
- Any recent home improvements or renovations you've made
If you spot errors, gather evidence such as permits, receipts and property records to support your case. Also, review the comparable homes used in the report — you might know of better matches in your neighborhood that weren't considered.
Get started with the home equity loan application process now.
Request a reconsideration of value (ROV)
"Appraisers are often receptive to reconsideration requests," assures Sobo. "[But] you [must] provide material information that may have been incorrect or excluded." This formal request asks the appraiser to take another look at the valuation based on new evidence.
Be specific about what you're challenging. "You can request an ROV if there are factual errors in the report, such as the wrong bedroom count, or if the appraiser overlooked upgrades you've made," explains Calixto. "You can also submit comparable home sales in your area that support a higher valuation."
However, Dean Rathbun, executive vice president at United American Mortgage Corporation, offers a reality check. "In my 36 years of closing mortgages, I only see about 20% to 25% of reconsideration requests adjusted to a higher amount," he says. While it's worth trying, manage your expectations.
Review comparables for opportunities
Even if your reconsideration request doesn't succeed, the appraisal report still holds valuable information. "Appraisals contain a side-by-side chart that shows what features other homes have, and the exact dollar amount they impacted the home's value," says Sobo.
This comparison can serve as your roadmap for future home improvements. If you need a higher property value for future borrowing, use these insights to make targeted improvements that appraisers value most in your neighborhood.
Consider alternative valuation methods
If your appraisal remains too low despite your efforts, Sobo recommends trying an automated valuation model (AVM) as a potential solution. "[It's] a low-cost alternative that may be more favorable," he says. AVMs often produce higher values than traditional appraisals for a few reasons:
- They're objective
- They're less likely to conservatively estimate a home's value
- They're not influenced by factors such as wear and tear, cleanliness or dated interior features
These digital assessments can provide instant results and lead to more attractive loan approvals. However, most lenders only accept AVMs for home equity loans and HELOCs under $250,000. So, ask your lender if this option is tenable for your situation.
The bottom line
A low appraisal doesn't have to be the end of your borrowing journey. If your efforts to increase your home's valuation aren't fruitful, discuss other financing options with your lender.
For example, "a renovation loan might be a great alternative if your goal is to make home improvements," suggests Calixto. "Unlike a standard home equity loan, a renovation loan considers what your home will be worth after the planned upgrades are complete."
Finally, don't limit yourself to one lender or one loan type. The right financing solution depends on your needs and situation. Work with a lender who offers various options and can guide you through promising alternatives.
