FINANCIAL ADVICE | home improvement
How to Get a Home Equity Loan
Published February 6, 2019
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So, you’ve decided to get a home equity loan. Maybe you need the money to remodel your bathroom or kitchen, or your kids are going off to college and you need a little extra for tuition, or an unexpected medical expense came up – whatever it is, a home equity loan can definitely help.
Generally speaking, a home equity loan is the right choice for people who need cash for a single major expense; home equity loans are probably not the best choice if you need to borrow a small amount of money (say, under $5,000).
You may have also heard of a home equity line of credit. What’s the difference between a home equity loan and home equity line of credit? With a home equity loan, you get the money you borrow in one shot, in a single lump sum payment and the interest rate is fixed over the life of the loan. With a home equity line of credit or HELOC, you can withdraw money multiple times until you reach the total amount of your credit line. But unlike a home equity loan, a HELOC usually has an adjustable interest rate which can go up or down depending on the prime rate.
How Do You Get A Home Equity Loan?
The first thing you need to get a home equity loan is to find out how much equity you have in your home; that’s the difference between your home’s market value and how much you still owe on the mortgage loan.
When you apply for a home equity loan:
- First, you’ll complete a home equity loan application with your lender of choice
- You’ll need to provide proof of your identity and that you actually own your home
- The lender will pull your credit report and review your monthly payments
- The lender will determine your available home equity and whether the loan amount you’re requesting is within the state of Texas’ maximum LTV (loan-to-value) ratio.
- The lender will also calculate your debt-to-income ratio (DTI); that’s your total monthly payments for housing and debt (not normal living expenses like food and utilities) divided by your total before-tax income
- You’ll need to prove your income; lenders analyze your income using either your tax returns (if you’re self-employed, have lots of investments, or work on commission) and/or your W-2s and pay stubs; you’ll need pay stubs for at least the past month, two years of tax returns, and three to six months of bank statements.
How Do You Qualify for a Home-Equity Loan?
The state of Texas laws and regulations regarding home equity loans require that you have no more than a maximum 80% loan-to-value ratio including the home equity loan in order to qualify. That means the combined balances of your home equity loan and any other mortgage cannot exceed 80% of your home’s appraised value.
Many lenders only provide home equity loans to borrowers with a good to excellent credit rating. Typically, a score of 640 or better is recommended for a home equity loan.
The lender will look at your credit score to determine whether or not you are a good candidate for a home equity loan. To assess your credit score or FICO score, the lender reviews all your credit files to see how credit-worthy you are. Here’s what goes into that score:
- Payment history; do you make payments on time on all your credit accounts
- The total amount owed on all credit accounts and how much of the total credit line you’re using
- Length of credit history; how long you’ve established you’re credit history and how long you’ve used certain accounts
- How many recent requests for credit you’ve had
- The total combination of credit cards, car loans, and retail accounts you have in your name
It goes without saying that the better your credit score and healthier your credit history, the better your chances of getting a loan.
Research & Shop Around for a Lender
Home equity loans typically involve smaller sums than mortgages so it’s easier to compare terms and rates. A good idea is to look beyond large banks and consider loans with local credit unions and community banks.
Like mortgages, most lenders charge points and other fees for generating a home equity loan, and these costs vary, depending on the lender. Some of the common fees include:
- Appraisal
- Arrangement
- Closing
- Early pay-off
- Originator
- Stamp
- Title
Here’s a Summary of What You Need to Know
You can help make the process of getting a home equity loan easier, go more smoothly, and faster if you take the right steps to prepare, including:
- Estimate your available equity to determine if you can get the amount you need; the sum of your Home Equity Loan and your mortgage balance cannot exceed 80% of your home’s appraised value. You can use the Available Equity calculator on our Home Equity Loan page.
- Calculate whether you can afford the loan amount you want by using our home equity loan calculator on our Home Equity Loan page.
- Do your research and lender comparison first; narrowing your choices down to 1 or 2 lenders is a good goal.
- Evaluate if a home equity loan or home equity line of credit is a better choice for what you need.
- Decide ahead of time what you are going to do with the money from the loan.
- Have a plan (and be sure to stick to it) for repayment.
- Get all the documents you need for the application together in advance and make a checklist; not doing this can really slow down the process.
- Make sure your credit score is where it should be; do everything you can to maintain or improve your score by making payments on time, not applying for new credit cards, and not maxing the ones you have out
Ready to Start Applying for Your Home Equity Loan or Line of Credit?
Ultimately, you’ll need to apply with your lender of choice to get your home equity loan or HELOC. If you haven’t done all of the research but are ready to get going anyway, that’s great! Just give us a call at 972-301-1880 to visit with a Home Equity specialist, or fill out the form on our Home Equity Loan page to have a specialist reach out to you.