- It's possible to obtain a home equity loan from your primary mortgage lender or another financial institution.
- Home equity loan requirements, such as minimum credit score and maximum debt-to-income ratio, can vary depending on the lender and your situation.
- Take your time to shop around and compare rates, fees, loan limits and other features to determine which offer is the best for you.
Home equity loans can provide much-needed financing for home renovation projects, a home down payment, debt consolidation and other purposes. But it's important to take your time as you choose a lender for your specific needs.
Here are some steps you can take to accomplish your goal and maximize your loan savings.
1. Review your current situation
Before you do anything else, it's important to assess your current financial and credit situation. While home equity loan requirements can vary by lender, you generally need a credit score of 620, a debt-to-income ratio (DTI) below 43% and an adequate amount of home equity:
Credit score: You may be able to obtain your FICO score for free through your bank or credit card company, or you can get it through Experian's free credit monitoring service.
DTI: You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income.
Home equity: Your home's equity is the difference between its fair market value and your primary loan balance. You can get an estimate of your home's value through websites like Redfin and Zillow, but the lender will typically request an appraisal to provide an official valuation. Most lenders will only allow you to borrow up to a combined loan-to-value ratio (CLTV) limit of 80%, which means that the sum of your primary mortgage and home equity loan balances cannot exceed 80% of your home's value. However, some lenders may be willing to go up to 100% if additional requirements are met.
You'll also want to consider your budget and whether a loan payment can fit comfortably without compromising other financial goals. Remember, if you fail to repay your home equity loan, the lender can foreclose on your home and kick you out, so it's critical that you make sure that the loan is a good financial move.
2. Determine your loan amount
Based on the value of your home equity and your financing needs, determine how much you want to borrow before you start comparing offers. Unlike a home equity line of credit (HELOC), you have to pay interest on the full loan amount with a home equity loan, so you'll want to make sure that you don't borrow too much.
At the same time, you want to make sure that you get enough to cover your financing needs so you don't have to take out more debt later.
To figure out the right loan amount, try using a home equity loan calculator like Bank of America’s. You can estimate monthly payment amounts by how much you’re borrowing. Then see if those monthly dues are affordable within your existing budget.
3. Compare home equity loan offers
You don't have to go through your primary mortgage lender to get a home equity loan. In fact, not all mortgage lenders offer both mortgage and home equity products.
Even if your lender does offer home equity loans, it's a good idea to shop around and compare offers from multiple lenders to ensure that you get the best deal.
"There is a wide disparity across the industry in terms of not only interest rate, but also whether or not the lender charges fees or passes on other origination costs to the borrower, how quickly the lender can close the loan and how easy it is for the borrower to access the line of credit post-closing," says Adam Boyd, head of home equity lending at Citizens Bank.
Some of the features you'll want to compare include:
Minimum and maximum loan amounts
Closing costs (some lenders don't charge them at all)
Ability to roll closing costs into the loan amount
You'll typically need to submit full applications to be quoted rates and terms that you can qualify for. But you can also review some of the general features lenders offer through their websites if you don't want to commit yet.
Also, don't fret too much if your credit score is below 620. Eligibility “varies significantly across the industry and would require a borrower to shop around, but there are options available," says Boyd.
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4. Submit your applications
Once you're ready to apply, submit applications with multiple lenders to compare final offers based on your creditworthiness, financial situation and property.
Lenders will typically require the following information and documentation:
Date of birth
Social Security number
Address and contact information
Other debt and existing liens on the home
Support obligations, such as alimony and child support, if applicable
Employment history and income
Income documentation, such as pay stubs, W-2 statements, bank statements and tax returns
Proof of homeownership and home insurance declarations page
Current mortgage statement
Lenders will also typically require an appraisal of your home to get its value. Note that it can take anywhere from a couple of weeks to a couple of months to complete the loan process, depending on the lender and how prepared you are with the required documents.
5. Choose a lender and sign the closing documents
Once you've compared multiple home equity loan offers, select the lender that provides the best value for your situation and complete the loan process, through which the lender will guide you. You'll typically receive the loan proceeds three business days after you close, and you may choose to cancel the contract during that three-day period if you change your mind.