How AVMs can boost property appreciation for home loans

In today’s challenging market, higher interest rates and home values ​​have created a unique opportunity for lenders to grow their home equity lending business. Despite the recent interest rate reduction, demand for home equity products remains high. Homeowners want to maintain their historically low interest rates in anticipation of a further decline in interest rates in the future. According to ICE’s Mortgage MonitorHome equity has grown by $5.5 trillion amid a more than 50% increase in home prices since the fourth quarter of 2019 – and average home equity per borrower has skyrocketed by nearly $95,000.

With more equity available due to higher home prices, homeowners are turning to home equity products to renovate their existing homes or pay off high-interest credit card debt with their home equity. Lenders can tap into this trillion-dollar market by integrating automated valuation models (AVMs) and digital property condition reports (PCRs) in their collateral valuation workflows. Home equity products, which usually fall under this Interagency Guidelines (IAG), do not always require a traditional assessment, making AVMs an ideal time- and cost-saving solution.

One of the highest cumulative costs of generating equity involves real estate ratings. Using credible and reliable AVMs, combined with thorough PCR, can give lenders an edge in the housing market battle. These AVMs allow lenders to grant approvals to borrowers more quickly, reducing appraisal costs. In cases where further confirmation of the property’s value is required, a desktop valuation with a PCR may also be a good option.

What are AVMs?

An AVM estimates the value of a property by analyzing its characteristics and recent sales transactions using advanced algorithms and mathematical models. AVMs take into account several factors to estimate the value of a property, such as:

• Recent sales
• Property features
• Geographic location
• Market trends

Lenders can use individual AVMs or an AVM waterfall to help determine the value of a property. An AVM waterfall uses multiple AVMs, each with their own mathematical formula, data sources, and geographic criteria. Each AVM (including the AVMs in an AVM waterfall) provides a confidence score to indicate the level of accuracy for the AVM value of that property.

What about the condition of the property?

While AVMs use robust data to estimate the value of a property, IAG also requires that home loan valuations reflect the current physical condition of the property. Lenders can use the latest digital valuation solutions to quickly capture the vital property condition information needed to complete the valuation process.

Validating ICEs provides cost-effective assessment of the condition of the property and the condition-adjusted value of the property. This consumer-facing solution allows the borrower to securely capture current photos and details of their property using their mobile device. The borrower is then guided through a series of steps to capture the required property information. Validate also uses computer vision technology to analyze photos provided by the borrower to help determine the condition and value of the property.

Combining highly accurate and proven AVMs with real-time PCRs can help deliver the credible results and confidence needed to address collateral risk.

Eligibility criteria for AVMs + PCRs

Qualifying home equity loans can start with an AVM and PCR to achieve a quick and easy valuation of the property while helping to reduce costs. When determining the feasibility of using an AVM, several criteria should be considered without introducing collateral risk. To use a Home equity product, the property must generally be a residential home with sufficient equity in an area with reliable market data.

Lenders also consider a wide range of other criteria, including Loan-to-Value (LTV) ratios, creditworthiness of the borrower, loan amount limitations, property type and condition, location of the property, and additional criteria on based on their risk tolerance and legal obligations. These suitability requirements help ensure that using an AVM is an appropriate valuation method for the property.

Leveraging AVM solutions for an improved customer experience

AVMs can not only provide significant time and cost savings for lenders looking to grow their home equity business, but they also provide a more streamlined and improved experience for the borrower. Early property valuation and pre-qualification help lenders set borrower expectations and avoid later frustration when the property’s condition or value does not meet loan requirements. By more quickly using an AVM and PCR, the lender can decide whether the valuation method meets its collateral risk policy, or whether a different type of assessment (desktop or traditional) is required based on the potential risk.

Keep in mind that when selecting an AVM solution, not all options are created equal. Their accuracy, consistency and objectivity depend on the data and analytical models used. Selecting an AVM partner that provides highly reliable AVMs, robust property and public records data, as well as transparent performance monitoring, offers clear benefits to increase confidence and reduce risk in home lending.