The Quick Read: Below-grade space adds zero square feet to the living area on a conventional appraisal, but it can still add dollars of value. The appraiser reports it on its own line and adjusts for it against comparable sales. That value feeds the loan-to-value math, which sets how much cash a conventional cash-out refinance can reach. Finished basements matter, just not the way a listing sheet suggests.
The numbers can come as a surprise. The listing said 2,400 square feet. The appraisal says 1,600 above grade and 800 below grade. Both numbers are right. They measure different things, and the appraisal uses them differently.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Lendmire’s cash-out refinance programs page lays out the leverage limits. This article covers the part that sits underneath those limits: how the lower level of your house gets classified, measured and valued before any loan amount is set.
What Do “Above Grade” and “Below Grade” Mean?
Above grade is finished living space that sits fully above the ground level outside. Below grade is any space that is partly or fully under it. One wall under the soil line is enough to make a level below grade.
Fannie Mae’s Selling Guide says the appraiser reports finished above-grade square footage, below-grade square footage and room count consistently. A walk-out level with finished rooms is still below grade. It stays out of the above-grade footage and the room count. The appraiser reports it separately and adjusts for it on the “Basement & Finished Rooms Below-Grade” line of the sales comparison grid.
Finish quality does not change the classification. Nice flooring, big windows and a full bath do not move a level above grade. They change the value the appraiser assigns, not the bucket.
Key Terms Defined
- Above-grade living area: Finished, heated space that sits entirely above ground level, measured from the outside walls.
- Below-grade area: Any space that is partly or fully under the ground level outside, whether finished or not.
- Walk-out basement: A lower level with a door to the yard at ground level; it is still counted as below grade.
- Sales comparison grid: The table where the appraiser lists similar sold homes and adjusts for differences like basement space.
- Loan-to-value (LTV): The new loan amount divided by the appraised value.
- Reconsideration of value: A request that the lender review an appraisal using new information or corrections.
Does a Finished Basement Add Value at All?
Yes. The space is left out of living area, but it is not left out of value. The appraiser compares your above-grade area to the comparables’ above-grade area, and your below-grade area to theirs, then adjusts each line.
So the dollars a finished lower level adds depend on what similar homes with finished lower levels sold for nearby. In a market where buyers pay for finished basements, the adjustment can be meaningful. In a market where they do not, it will be small. Per square foot, below-grade space is generally worth less than above-grade space.
This is the mechanical core of the topic. The appraiser is not choosing to “give you credit” or “deny it.” The appraiser reports what is there and lets the sold comparables set the price.
How the Appraiser Measures and Sorts the Space
Under Fannie Mae’s standardized property measuring guidelines, which follow the ANSI standard, any space partly or completely below grade is reported as basement area. Finished areas need at least 7 feet of ceiling height to count as finished in the standard way.
The appraiser then puts each level in one bucket:
1. Finished above grade, which counts as living area.
2. Finished below grade.
3. Finished below grade (nonstandard), a newer category in the updated report format.
4. Unfinished below grade.
The updated report format, UAD 3.6, separates those categories on the form. Fannie Mae and Freddie Mac’s UAD 3.6 FAQ sets a mandate date for new appraisal reports submitted to the delivery portal. The form changes labels and reporting categories. It does not change the below-grade rule itself, which already follows the ANSI-based policy. Where older reports said “GLA,” the new one says “Finished Area Above Grade.”
Classification Table: Which Spaces Land Where
| Situation | Counted as living area? | Reported as |
|---|---|---|
| Full finished basement | No | Finished below grade |
| Walk-out finished level | No (conventional) | Finished below grade |
| Daylight basement, one wall below grade | No | Finished below grade, or unfinished below grade if not finished |
| Unfinished basement | No | Unfinished below grade |
| Low-ceiling finished space | Often reported as nonstandard | Nonstandard below grade |
| Split-level, partly below grade | The below-grade part is not counted | Split between categories |
The split-level row is where homeowners get confused. A level is below grade if any part of it is, so the appraiser has to decide how to classify and measure the portion under the soil line. Conventional loans follow the stricter reading. Government-backed appraisals have more room, covered below.
Where the General Rule Breaks
The rule is firm on conventional loans. Here are the named exceptions and edge cases.
Walk-outs. A walk-out level with finished rooms is below grade. Some borrowers assume the door to the yard changes that. It does not.
Homes built entirely below grade, or where ANSI measuring is physically impossible. Fannie Mae’s measuring guidance allows an exception in these cases. It also covers homes where the 7-foot ceiling height is met in only part of the area. The guidance says Fannie Mae will watch for misuse of exceptions, such as reporting above-grade footage as an exception.
FHA and VA appraisals. These are more flexible. HUD’s glossary defines gross living area as finished, habitable, above-grade space. It also defines “Partially Below-Grade Habitable Space” as living area built partly below grade that has the full utility of above-grade space. The VA Lenders Handbook lets the appraiser decide whether partially below-grade space counts as living area or gets valued separately. The VA appraisal chapter ties that decision to design, quality, full utility and market acceptance. For more on how equity is counted on a VA cash-out, see Lendmire’s piece How Much Equity a VA Cash-Out Refinance Counts From the Appraisal.
Two- to four-unit properties. Fannie Mae’s gross building area includes all finished above-grade and below-grade living areas, along with interior common areas like stairways and hallways. Below-grade space can sit in the building total without being part of gross living area.
Accessory dwelling units. The Selling Guide says an ADU’s living area should not be added to the finished above-grade footage of the main house. A finished basement apartment, or a detached unit, is valued on its own terms.
Unpermitted space. The Selling Guide requires the appraiser to comment on an addition that lacks a required permit. Finished space that fails on ceiling height, egress or being below grade can be hard to count as living area, whatever its permit status.
Streamlines. The FHA Streamline and the VA IRRRL generally involve no appraisal on an existing government loan. Neither is a cash-out loan, so below-grade space does not come up unless an appraisal is ordered anyway. A VA cash-out refinance does require one.
How the Appraised Value Becomes Your Cash
The appraised value is the bottom of the loan-to-value fraction. A lower value shrinks the maximum new loan. Less loan means less cash after your current mortgage is paid off.
Across the programs Lendmire places files with, a conventional cash-out refinance reaches 80% of value on a one-unit primary residence, and 75% on two- to four-unit primary residences, second homes and investment property. Occupancy sets the leverage. In Texas, a cash-out on a homestead is capped at 80% of the home’s value by the state constitution. A wholesale lane reaches 89.99% LTV with no mortgage insurance for borrowers with a 680 score and a 50% ratio on a thirty-year fixed on a primary residence at a conforming balance. That lane carries its own six months of seasoning and is not written in Texas. All of it is subject to lender guidelines and full file review.
Seasoning also applies. The first mortgage being paid off must be at least 12 months old, note date to note date, and a borrower must be on title for 6 months. Delayed financing, inheritance and legal-award exceptions exist.
Mortgage insurance is required above 80% LTV on the agency path, except for that no-MI wholesale lane. The borrower can request cancellation at 80% of the original value and the servicer must end it automatically at 78%. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
A Worked Example With No Dollar Figures
Take two versions of the same house. Same lot, same upstairs, same finished basement. Only the appraisal treatment differs.
| Input | Version A | Version B |
|---|---|---|
| Finished lower level in the adjustments | Valued with local comps | Valued low or excluded |
| Appraised value | Higher | Lower |
| Cash-out LTV (one-unit primary) | 80% | 80% |
| Maximum new loan | Higher | Lower |
| Cash after paying off current loan | More | Less |
The LTV cap is identical in both columns. The value is what moves. A borrower whose house is “worth” the listing’s total square footage is often really working from Version B’s reality, where the below-grade area added less than expected.
This is also why the mismatch with listing and county records matters. Those records often fold finished basements into one square footage number. The appraisal splits them. Plan your cash on the appraisal’s logic, not the listing’s.
Before the Appraiser Visits
Prep helps most when it prevents a misclassification. A short checklist:
1. Measure the finished lower level and note ceiling height in each room.
2. Gather permits for any finished basement work, or note that none exist.
3. Confirm heat, a finished floor and wall covering in the lower level, and note egress windows in any basement bedroom.
4. List recent nearby sales of homes with finished lower levels.
5. Note any updates since the last sale, with dates and paperwork.
The appraiser makes the call. Still, clean information keeps a finished level from being reported as unfinished, or a bedroom from being left off for lack of an egress window.
If the Number Comes In Low
You have a right to see the appraisal. Under the ECOA Valuations Rule, the CFPB’s consumer summary explains that the lender must tell you, early in the application process, that you will get a free copy of any appraisal. You may be asked to waive the advance-copy timing, but the copy must still reach you at or before closing.
Read the report line by line. Check the above-grade and below-grade figures against your own measurements. Check whether finished rooms were reported as finished. Check the comparables for similar lower levels.
If something is wrong, ask for a reconsideration of value. Reconsideration is a review, not a promise of a higher number. A well-documented packet is the strongest version of it.
Misconceptions That Cost Borrowers Cash
- “Finished basement means living area.” On conventional loans, a level is below grade if any part of it is.
- “Below grade means no value.” It is reported separately and adjusted. It just isn’t in above-grade footage.
- “Walk-out means above grade.” Not under Fannie Mae’s rule. FHA and VA allow a market-based exception for partly below-grade space with full utility.
- “There’s a minimum square footage.” Fannie Mae sets none, except for manufactured housing.
- “The new form changes how much counts.” The new form changes labels and categories, not the rule.
- “Every refinance gets appraised the same way.” Government streamlines generally skip the appraisal. A cash-out does not.
Frequently Asked Questions
Does a finished basement count toward square footage on a cash-out refinance appraisal?
Not as living area on a conventional loan. It is reported as below-grade area on its own line and valued by comparison with similar sold homes. It still affects the appraised value, which affects the loan amount and the cash available.
Does a walk-out basement count as above grade?
Not under Fannie Mae’s rule. A walk-out level with finished rooms stays below grade and out of the above-grade footage and room count. FHA and VA appraisers have more room to treat partly below-grade space like living area when it has full utility and the market accepts it.
Why is my appraisal’s square footage lower than my listing?
Listings and county records often fold finished basements into one total. The appraisal separates above-grade from below-grade space. Both numbers can be correct while measuring different things.
Do basement bedrooms and baths count in the room count?
Not on a conventional appraisal. Rooms in below-grade space are left out of the above-grade room count. They can still add value through the basement line on the adjustment grid.
What can I do if the appraisal undervalues my finished lower level?
Review the report for measurement or classification errors, then request a reconsideration of value with recent nearby sales and documentation. The lender reviews the request and decides. A reconsideration does not guarantee a change.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B4-1.3-05
3. UAD 3.6 FAQ (Fannie Mae/Freddie Mac)
4. HUD Handbook 4000.1 Glossary
6. CFPB: What the ECOA Appraisal Rule Means for Consumers
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Much Cash Comes Out of a Cash-Out Refinance Without an Appraisal on the New Loan? · How Much a Cash-Out Refinance Lends on a Recent Purchase · How Much Cash Comes Out of a Cash-Out Refinance Based on Property Type?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.