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You hear a lot about tapping on a home equity against the value of your home for recent cash. Unfortunately, it’s not always easy to get approved for a Home Equity Loan or Home Equity Credit (HELOC). They are similar to mortgages, but the rejection rate is much higher. Nearly half of the HELOC applications have been denied recently, according to Mortgage Disclosure Act data.
If you’re thinking of tapping Home Equity, we’ll provide you with a step-by-step guide on how to smoothly navigate the Home Equity Loan application process and ensure the possibility of approval.
What are Home Equity Loans and Helock?
Home Equity Loans and HELOCs are the two most common ways to borrow against the value of your home. Both are a form of a second mortgage, but differ in a number of important respects.
Home Equity Loans offer lump sum payments at a fixed rate. You must pay back periodically with fixed payments over the set period. This loan is perfect for homeowners who require a specific amount for a large one-time expense.
HELOC offers revolving credit lines similar to credit cards with a variety of interest rates. A credit line gives borrowers flexibility as they allow them to withdraw money as needed, typically for 10 years. They can repay those funds, replenish the balance and then pull back again. Ultimately, this period will end and they must begin to fully repay the funds they borrowed.
Home Equity Loan Approval Process Steps
Your home equity loan application includes several important stages on the road to approval. Here is a detailed breakdown of each step in the process:
1. Determine the qualification
Before applying for a home equity loan, make sure you are able to meet the minimum requirements.
- Home Equity: A home needs at least 20% capital, but some lenders can have just 10%. If your interest equals more than half the value of your home (aka “substantial stock”): the more you own the more you can borrow.
- Credit score: Credit scores for the mid-600s are usually the minimum accepted value. But AA scores in the 700s will give you the best rates and terminology.
- Debt Income (DTI) Ratio: DTI measures your total monthly income against monthly obligations. Lenders hope that their DTI is below 43%, as it indicates that their obligations are less than half of their revenue and there is a place to undertake additional liabilities.
- Combined Loan to Value Ratio (LTV): CLTV compares the amount you want to borrow against the value of your home and considers all the loans backed by your home (including mortgages). Lenders usually limit CLTV to 80-85%. Rationale: Maintaining an undeveloped fairness cushion, if the property value drops, it will not pay more to the home than its value.
- income: There are no set income requirements to be approved, but you need to demonstrate that your income is stable and consistent enough to handle your loan payments comfortably. The lender will also see how long you are in your current job.
2. Find out and compare lenders
Compare offers from at least three lenders, including banks, credit unions and mortgage/home lending companies. Make sure to include both brick and mortar and online lenders. Each lender has its own interest rate and its own rate, which is very different. Therefore, make sure to compare the APRs of your ads that take both into consideration.
3. Submit your application and documents
Some lenders may complete the application online, phone or in person. This process usually involves providing personal information, home details, and financial documents (see “Information Need to Provide” below). The lender will check your credit history with your account and debt obligation list, as well as your credit score. However, you need to prepare to provide proof of income and homeownership.
4. I’ll do the underwriting
Underwriting reviews are one of the most important steps in the home equity loan process. At this stage, your lender will assess your creditworthiness, home value, assets, liabilities and ability to pay off your loan. We may review all of the documents submitted and request additional documents.
5. Loan approval and close the loan
Once approved, you will receive a loan estimate that outlines the terms of Heoan or Heloc and the various closure costs. After agreeing to them, you will sign the final document and attend the closing meeting to pay the fee or prepaid fee. Funds are usually received within the next few days.
Information you need to provide for your Home Equity Loan
To apply for a home equity loan, you will need to collect some documents to confirm your identity, income and assets. Here’s a checklist of what you need.
- Identity/Personal Information Proof: You must provide a Social Security number, date of birth and a government-issued photo ID (such as a driver’s license or passport).
- Income document: Depending on your employment situation, you may need a recent PayStubs, a two-year, business and federal tax return, a Social Security Income or Pension Award letter, an investment statement, or a rental income agreement.
- Property information: Among the documents you should have at hand are the homeowner’s insurance declaration, property tax statement, household ownership and title insurance contracts (if any), and flood insurance records (if your home is in a flood zone).
Tips for Smooth Home Equity Loan Approval
No one wants to be turned down for a home equity loan or a loan for that. However, fundraising seems to be becoming more difficult these days.
Below are some tips on how to improve your chances of being approved for home equity funding.
- Check your credit score: Make sure your credit report is accurate and resolve (or at least object) to the inaccuracy before applying. The higher the score, the more likely you are to get approval, and help you ensure better rates and conditions.
- Lower your debt: Will much of your monthly income come out again to pay your continued obligations? We will improve eligibility by repaying unpaid balances as much as possible. Doing so will improve your credit score.
- Please organize your documents:W2, major mortgage details, and all relevant documents and information can be prepared in advance to speed up the process. The sooner you enter, the sooner they start underwriting.
- Stop shopping: Don’t make large purchases or take up big new debts before the loan closes.
