A Home equity loan is a type of loan in which a homeowner borrows money against the value of their home. Like a home equity loan, it is a second mortgage that uses your home as the collateral for the borrowed money. Interest rates for home equity loans are generally lower than interest rates of other financing types which makes home equity loans quite popular among homeowners. If you are thinking of getting a home equity loan, here is a guide for what to do and where to start.
Determine If You Qualify One of the first steps to take before applying for a home equity loan is to understand the requirements for the loan. Here are some of the common eligibility requirements:Here are some of the common eligibility requirements:
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You need to have enough equity in the property. As mentioned earlier, most lenders will expect you to have at least fifteen to twenty percent equity before they fund you. The equity in your home is calculated by the difference between the current market value of your home and the balance of your mortgage.
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You require to have a good credit, preferably a FICO score of 620 or above. When you are applying for credit, the closer your score is to the top, the better your chances of approval, rate and service grades.
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You also have to be current on the current mortgage that you are paying. And if you have been making a regular default then it gives signals that you are not capable of handling more liabilities.
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The income should be sufficient to cater for the present mortgage along with the new home equity loan repayments. Lenders do not want you to become a risk to your financial status by borrowing beyond your limit.
So if you fall in any of these categories, then you qualify to be approved for a home equity loan
Compare Lenders The next step after deciding that you meet the requirements is to compare the various home equity lenders that are available in the market. Terms and rates may differ from one lending company to another. Here are some things you will want to look at when you are trying to find two things that are similar:
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Interest rates. There are two types of interest rates associated with home equity loans namely variable rates and fixed rates. Be aware of the type of rate and its fluctuation between different lenders. Every percentage point saved means significant amount of money in the entire loan tenure.
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Fees. Compare the initial charges and the fee structure of the various lenders. Do not work with lenders who take charges for early repayments or paying off the loan before the stipulated time.
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Loan terms. The repayment period of home equity loan usually falls between five and thirty years. Think about how much monthly installment you are willing to make and how soon you want to clear your loan.
When comparing home equity lenders, you should consider both national and local home equity loan providers, including credit unions and community banks. It is always a good sign to have more options available and this means better chances of landing the best loan deal.
Complete the Loan Application Having identified a lender that you wish to borrow from, the next stage is to apply for the home equity loan formally. As part of the application process, be prepared to submit the following:As part of the application process, be prepared to submit the following:
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A filled loan application form. This gathers the basic personal and financial details you give about your age, income, current loans and assets, credit history, purpose of the loan and the sum you want to borrow.
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Employment history and other proof of income documents. This often includes submitting recent pay stubs, W-2 forms or the latest tax returns. Independent professionals may be required to submit income-tax returns and balance sheets, while self-employed borrowers may need to produce profit and loss statements.
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Your mortgage statement. Information regarding the outstanding balance, monthly installments, and payment history on the home is crucial for underwriting.
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Home valuation or home appraisal. The lender has to assess the current market value of your home to establish available equity. While there are cases where a full appraisal is necessary, there are other cases where an automated valuation model estimation may be sufficient.
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That is identification and other documents that are required by the company before employment. In a typical lending company, you will be asked to produce a copy of driver’s license or other government issued identification card, social security card as well as other documents including utility bills or insurance policies for identification and residency purposes.
Ensure that one completes every form neatly and submits all documents that the lender may require. Lack of necessary papers can hinder the processing and approval of your home equity loan.
Get Pre-Approved It is advisable to undergo the pre-approval process before arriving at the choice of the final loan. Pre-approval is a preliminary step where the borrower gets an idea of the amount of loan, interest rate and the terms that would be offered to him or her. It also demonstrates to the lenders that you are a credible applicant and you can help to hasten the last stages involved in the underwriting once you have applied formally.
The pre-approval is an initial credit check, income verification, and home equity to provide the borrower with a conditional commitment letter. This helps you estimate your chances of approval before paying for the appraisal fees and other initial costs.
Close on Your Loan The last process is home equity loan completion and financing. This is very similar to when you originally closed on your home mortgage:This is very similar to when you originally closed on your home mortgage:
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Last steps in underwriting and getting the final approval. The lender completes any final check of your documentation and provides the final nod of your approved loan.
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Disclosure forms. Be prepared to initial or sign documents verifying receipt and understanding of all required loan disclosures including the Truth in Lending statement in the days prior to closing. Read these carefully.
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Loan closing appointment. This meeting can be conducted in a title company or an attorney’s office. You will complete all your loan papers and forms, and then the lender will issue the check for the amount you have borrowed.
On average the whole process from application to funding may take up to two to six weeks depending on the efficiency of your lender.
Home equity loans enable homeowners to access available home equity for such purposes as home improvements, education expenses, debt consolidation, and others. Going through this application process will enable you to get the best loan deal that will enable you to tap this equity in your home. Lenders may ask questions that will not have been covered in the documents submitted, and it is helpful to be ready with answers to such queries. Nonetheless, taking a systematic and informed approach, it is quite easy to get approved for home equity loans for most homeowners.
