The process of getting a home equity loan is relatively straightforward.
It works similarly to other mortgages: You’ll compare offers, choose a lender, apply, and provide documents like pay stubs and bank statements. The lender will review your application and order an appraisal. After approval, you’ll sign the closing papers, pay the upfront fees, and receive your cash.
Many homeowners prefer a home equity loan over refinancing because it cashes out equity without replacing their existing mortgage. If you’re wondering how to get a home equity loan, here’s your guide.
A home equity loan is a type of lending product that allows homeowners to borrow against the equity they’ve built up in their homes.
Home equity loans work similarly to primary mortgages. After qualifying for the loan based on your credit score, income, and the amount of equity in your home, the lender provides a lump sum of money. You’re then obligated to repay this amount, along with interest, in fixed monthly payments over a predetermined period (the loan terms).
The amount you can usually borrow is a percentage of your home’s appraised value minus the amount you still owe on your mortgage. This total establishes a credit limit for your loan.
It’s important to note that as you make loan payments, you’re not just paying loan interest; you’re also paying down the principal loan amount. This structure differs from interest-only payment structures, where borrowers pay interest during the initial loan term and then pay off the principal in a lump sum.
While home equity loans can provide significant financial resources for things like home improvements or paying down high-interest debt, they also come with risks. The most notable is the risk of foreclosure if loan payments are not made. Therefore, it’s critical for homeowners to carefully consider their ability to make monthly payments before taking on a home equity loan.
Your home isn’t just a place to live; it’s also a potential source of financial flexibility. But understanding how to obtain a home equity loan can seem daunting at first. Don’t let that stop you! Here, we demystify the home equity loan process.
Ready to unlock the value in your home? Let’s show you how to apply for a home equity loan.
The first of the key steps to get a home equity loan is deciding how much cash you need. Unlike a home equity line of credit (HELOC), which allows you to tap your equity as needed over time, a home equity loan requires you to borrow a specific loan amount upfront. Calculate how much money you need before applying for a loan, as the amount you borrow affects the total cost.
Your credit score matters when applying for a home equity loan. You’ll generally get a lower interest rate and better terms if your score is 700 or above. The minimum score needed to qualify is usually 620.
To check your credit score for free, inquire with your bank or lender or log into your credit card account (many credit card issuers provide free credit scores). Just note that free scores may be higher than what a mortgage lender will see. For a more accurate number, you can purchase your credit score directly from Experian, TransUnion, Equifax, or FICO.
If your score is lower than desired, try to improve your credit before starting the home equity loan approval process.
You can improve your credit by paying your bills on time, not opening any new accounts or lines of credit, paying your amounts due in full versus the minimum balance, and correcting any inaccuracies you see on your three free credit reports. Keeping your credit usage below 30% of your total limit helps keep your score healthy.
When you’re ready to apply for a home equity loan, the first step is to get quotes from multiple lenders and compare your offers. Rates and fees vary considerably from one lender to the next, so shopping for the best deal is important. Banks, mortgage companies, credit unions, and online lenders offer home equity loans.
“After you know how much equity you have, it’s time to start shopping for lenders. Compare rates and terms from several lenders before choosing one,” suggests Boyd Rudy, associate broker with Dwellings Michigan. “Be sure to compare not only interest rates but also closing costs and fees.”
You’ve chosen your preferred lender. Now it’s time to move forward with the home equity loan steps and formally apply for the loan, which can be done online, over the phone, or in person if the lender has a brick-and-mortar office.
When it comes to filling out your application, the steps for a home equity loan are similar to any other mortgage. Lenders will ask for the same types of financial documentation. And if anything is unclear or the underwriter finds an issue, you might be asked for supporting documents or a letter of explanation.
“The application process will vary from lender to lender. But most will require you to fill out a form and provide financial documentation, such as tax returns, bank statements, and proof of income,” says Rudy. “The lender will likely also order a home appraisal to determine the current market value of your property.”
After submitting your home equity loan application, you’ll await approval. “The lender’s underwriting team will review all of your documents and complete some form of inspection to understand the value of your property. The lender will let you know of any next steps required during this time,” Shirshikov notes.
Once you’ve successfully navigated the approval process of a home equity loan, you’ll enter the final stage. You will receive a closing date and instructions on where, when, and how the closing will proceed. “At closing, you will sign several documents and disclosures, and the funds will be deposited into your designated bank account,” adds Shirshikov. The lender may allow you to have funds wired to your account or issued via check.
The process of getting a home equity loan often takes up to four weeks or longer, from when you apply to when you actually receive funds. Wait times depend on how efficient your lender is, how long the appraisal takes, and whether any issues with your application need to be addressed.
If you qualify for a home equity loan, you can typically borrow up to 80% of the value of your home, minus any outstanding mortgage debt. That means you need more than 20% equity accrued to seek approval.
“You can use survey sites [like] Zillow to get an idea of your home’s current value and accrued equity,” suggests Michael Hausam, a mortgage broker and Realtor. Keep in mind that online estimates are not 100 percent accurate.
calculated your home equity value, multiply it by 80% to find the maximum amount you can borrow between your primary and second mortgages. Then subtract your existing loan balance to estimate your maximum home equity loan amount. For example:
Not all homeowners can borrow the full amount of equity available. Your loan amount depends on your credit score and financial situation. In addition, withdrawing more of your equity can lead to higher interest rates.
You’ll need to satisfy a number of key home equity loan requirements if you want to qualify. These include having enough home equity, maintaining a reasonable debt-to-income ratio, demonstrating a good credit score, providing financial documentation, and having funds for closing costs.
An important requirement for a home equity loan is that you have enough equity in your home. The equity in your home is calculated by subtracting your outstanding mortgage balance from your property’s current market value.
To determine whether you meet the equity criteria, lenders typically use metrics such as the loan-to-value ratio (the mortgage balance relative to the value of your home) and the combined loan-to-value ratio (CLTV, which accounts for all loans on the property). Lenders typically approve home equity loans with an LTV or CLTV of up to 85%.
When you apply for a home equity loan, lenders will look at your debt-to-income (DTI) ratio. This percentage ratio represents your monthly debt obligations divided by your gross monthly income. A lower DTI ratio typically makes you more appealing to lenders, indicating that you have a healthy balance of income and debt that will allow you to repay the loan.
A good credit score is a basic requirement for obtaining a home equity loan. A high credit score (620 or higher) indicates to lenders that you have consistently managed your credit in the past and are thus less likely to default on repayments. Here are some tips on how to raise your mortgage FICO score fast.
Lenders will request a variety of financial documents to assess your financial situation and confirm your income. Recent pay stubs, tax returns, bank statements, proof of employment, and investment account statements are examples. You may also need the most recent mortgage statement and proof of homeowner’s insurance for any existing home loans.
Providing this documentation assists the lender in determining your financial situation and the loan’s affordability.
Finally, be prepared to pay closing costs, which can range between 2% and 6% of the loan amount. Some of these costs could be fees for the home appraisal, the loan origination, the title search, and the processing. Some mortgage lenders will roll these costs into the loan; however, this will increase the loan amount and possibly the interest rate.
Some mortgage lenders want you to wait up to six months after you buy or refinance before you can apply for a home equity loan. This is known as a “seasoning requirement.” However, not all lenders require loan seasoning. If you made a big down payment and have plenty of equity, you might be able to qualify shortly after buying the property.
Home equity loans are often denied when homeowners have insufficient equity. “The loan amount must be less than the value of your home. So if your home has decreased in value or your outstanding mortgage balance is high, the loan may be denied,” cautions Joshua Haley, founder of Moving Astute.
A home equity loan can be a great option when you need to borrow a large sum of cash. Since home equity loans are a type of mortgage, interest rates are low compared to credit cards or personal loans. And you only borrow what you need, unlike a cash-out refinance, which resets your entire mortgage loan.
Be aware that, when going through the steps to getting a home equity loan, your property serves as collateral to secure the loan. That means if you cannot make your payments, you could risk foreclosure.
When deciding whether to borrow against the equity in your home, home equity loan rates are an important factor to consider. These rates frequently correlate with the prime rate, which is the interest rate that commercial banks charge their most creditworthy customers. Home equity loan rates are typically higher than mortgage rates because lenders perceive them to be riskier.
the loan-to-value ratio, and the prevailing market conditions.
Some lenders may offer fixed or variable rates, so it’s important to understand how these structures could impact your repayments over time. Borrowers should compare interest rates from multiple lenders to ensure they are receiving a competitive offer.
Before deciding on the home equity loan process, it’s important to carefully weigh the pros and cons. When researching loan options, keep your financial situation, repayment ability, and long-term financial goals in mind.
Home equity loans can be a beneficial option for homeowners looking to finance big-ticket items like home renovations, debt consolidation, or large personal purchases.
A HELOC is a popular alternative to a home equity loan. Unlike the latter, which provides a lump sum, a HELOC gives you a line of credit that you can draw from as needed during a set “draw period.” The repayment period begins after the draw period ends, and the total repayment term often ranges from 15 to 30 years.
Like a home equity loan, a HELOC uses your home as collateral, but it functions more like a credit card, offering flexibility in terms of accessing your money. HELOC rates are typically variable, meaning the homeowner’s interest costs can fluctuate over time.
Refinancing your first mortgage to tap your home’s equity is another option. In a cash-out refinance, you take out a new loan for more than you owe on your current mortgage. You receive the difference in cash and can use it for purposes like home renovations or debt consolidation. The new loan replaces your old one, and its interest is often tax-deductible, just like with your original mortgage.
If you don’t want to use your home as collateral, a personal loan could be a good alternative. While personal loans often come with higher interest rates than home equity products, they provide quick access to funds without tying the loan to your real estate property. This type of loan could be a good fit for smaller projects or immediate needs.
Another option, particularly for smaller expenses, is to use a 0% APR credit card. Many credit card companies offer introductory periods with no interest, which can be an affordable way to finance a project, provided you can pay off the balance before the promotional period ends. It’s important to note that once the introductory period ends, the interest rate can increase significantly.
Finally, a CD loan might be a viable option if you have money tied up in a certificate of deposit. Essentially, you’re borrowing against your own money. The bank holds the CD until you pay off the loan. The benefits are that these loans often have lower interest rates, and they don’t require a hard inquiry on your credit report.
Each of these loan options comes with its own benefits and risks, all dependent on your unique situation. Therefore, understanding the loan terms, the appraised value of your property, interest rates, and your personal finance goals are all crucial when choosing the right loan product. Always consider consulting a financial advisor or mortgage professional to discuss which type of loan best suits your needs.
The timeline for getting a home equity loan after buying a house depends on building sufficient equity, typically 15-20%. With a large down payment, you might qualify immediately. In rapidly appreciating markets, you could qualify within 6-12 months. With a smaller down payment, it often takes 2-5 years. Some lenders impose a waiting period, regardless of equity.
What is the process of getting a home equity loan?The process of getting a home equity loan involves assessing your finances, checking your credit, and calculating your home equity. Research lenders, gather documentation, and submit your application. The lender will process your application and order an appraisal. If approved, you’ll review the offer, complete closing, and receive funds.
Does a home equity loan require a credit check?Yes, a home equity loan does require a credit check. Lenders use this check to assess your creditworthiness and determine your interest rate. A good credit score can not only improve your chances of approval but also help you secure a lower interest rate, which can save you money over the life of the loan.
How to get a home equity loan with bad credit?Getting a home equity loan with bad credit can be challenging, but it’s not impossible. Some lenders may be willing to consider other factors, such as a low debt-to-income ratio, stable employment, and a substantial amount of equity in your home. However, you might face higher interest rates as a result. You could also consider bringing on a co-signer with a better credit score to improve your chances of approval.
Does a home equity loan require an appraisal?Yes, a home equity loan generally requires an appraisal. Lenders use this appraisal to determine the current market value of your home, which, along with your outstanding mortgage balance, allows them to calculate how much equity you have in your home. This figure plays a significant role in determining the maximum amount you can borrow.
Now that you understand the home equity loan process, it’s important to remember this isn’t the only route you can take when you need extra money. As you explore how to apply for an equity loan, be sure to compare benefits, interest rates, and terms with other financing options, like a HELOC or cash-out refinance.
“Also, remember that your home is your largest asset. As such, you should always plan for how the debts you have against your home will be repaid,” recommends Scott.
If you’re ready to move forward with the process of getting a home equity loan, start by checking out the best home equity loan rates from a few different lenders to find the most affordable option.