What Do Banks Use to Determine House Value & Home Equity?


There is nothing more disheartening for a homeowner than to see a gain in house values, make an effort to access the equity in his property, and then discover that he does not have access to as much of it as he had anticipated. The value of a house is difficult to pin down since it is subject to continuous shifts, and banks are required to depend on particular risk factors and professional appraisers. The amount of equity in the residence is computed once the current valuation has been established.

Understand Fair Market Value

The majority of homeowners who look at websites like Zillow believe that the estimate of their home’s worth that is posted on the website is either reasonably near or the real value of their property. Although these estimates are useful jumping off points for evaluating property prices and trends in the market, it is important to note that they are not completely accurate. In point of fact, there are instances in which these estimations are predicated on a really hot real estate market in which properties move into escrow despite the possibility that they do not fulfil appraisal requirements. A homeowner should utilise these sites to acquire an estimate of the worth of their property, but they should also take into account the most recent trends in the neighbourhood.

Determining Appraised Value

When determining the current value of a house, a bank will consult with a certified appraiser. The square footage of the property, the size of the land, the number of bedrooms and bathrooms, as well as any amenities such as a den, smart home features, a pool, or a shed are all factors that are considered by appraisers. The state of the house is another factor that is taken into account. A house that has been recently renovated is likely to have a greater value than one that has been carefully maintained. Even if it has the same fixtures and amenities as another property, the value of the badly kept one will be lower.

Using the fundamental information about the house, the appraiser locates other houses in the region that are comparable to the one under consideration. It’s possible that cities like San Francisco have enclaves of upscale real estate tucked away next to parts of the city that are less appealing. A competent appraiser will take into account the pocket and will avoid using comparables from outside the pocket since doing so might distort the value. A minimum of three active listings and three transactions that occurred within the most recent three months are normally included during appraisals. In sluggish markets, the geographic comparison may be expanded, or the most recent purchases might stretch back as far as six months. Both of these strategies are possible.

Calculating Home Equity

Equity may be determined using a straightforward equation that uses the subtraction operator. Subtract the amount still owed on your mortgage from the current value that an appraiser has placed on your house. Deduct the value of any additional liens that you hold on the property, such as a second mortgage or a home equity line of credit with an outstanding debt. The amount that is still outstanding represents the equity in your house.

Take, as an example, a house in San Francisco that costs $900,000 and has a debt of $650,000. The equity in the residence is $250,000, which is equal to $900,000 minus $650,000. You won’t be able to borrow the whole amount of equity from the bank. The majority of lenders will not provide permission to borrowers to borrow more than 80 percent of the value of their house. This indicates that even if you have equity, you may not be able to access the money in it. In the previous example, $720,000 represents 80 percent of the total value of the property. After that, you would be allowed to take out a loan for a total of $720,000. There is still some equity available, amounting to $70,000, after the mortgage has already eaten up $650,000 of the entire borrowed amount.

There isn’t one standard set of rules that all banks adhere to when it comes to credit and income. Ask your lender whether you qualify for more.