Applying for this kind of loan is similar to applying for a traditional mortgage, with some variations in requirements. These requirements vary by lender and loan type, but the most common are income, cash on hand, credit rating, and debt-to-income ratio. Learn what financial requirements you must meet to qualify for a home equity loan and what documentation lenders want to see, such as proof of income, credit history, and tax returns.
Home Equity Loan Requirements
Lenders look at various factors when considering a home equity loan application. Requirements may vary depending on the lender, so compare your options. Some requirements are:
Home equity: You must have home equity. Equity is the difference between how much you owe on your mortgage and the market value of your house. The amount you can borrow depends on the lender, your credit history, and other factors, and can be as much as 95% of the equity in your home. However, most lenders prefer that you borrow no more than 80% of your home’s equity. Loan-to-value ratio: Lenders use your home’s equity to calculate a loan-to-value ratio (LTV) to see whether you qualify for a home equity loan. Banks and credit unions require different ratios, such as an LTV of around 75%-80%. Credit score: Credit score requirements typically are set at 700 or above. Lower scores may lead to higher interest rates or high requirements in other areas. Income: Lenders will look at your gross income—your income before taxes, debts, and deductions—to calculate DTI. They may also hope to see steady income. Debt-to-income ratio (DTI): DTI measures how much you have to pay in debt each month as a percentage of your monthly income. Your debt-to-income ratio should be no more than 43% of your gross monthly income, including the mortgage. Payment history: Lenders will want to see a credit history showing your financial trustworthiness, which indicates that you’re a low-risk borrower. They’ll also look at the other debt obligations you must pay monthly.
Materials You’ll Need To Apply for a Home Equity Loan
Lenders will want to see proof of your financial history and income, residence, and identity. Typically, you need the following documentation and information when applying for a home equity loan.
Personal Identification
Any government-issued ID will work for personal identification. You can submit your driver’s license, state-issued ID, or passport to prove your identity.
Proof of Income
You need to show proof of your gross income. Form of proof may depend on whether you’re employed, self-employed, or receiving retirement or other supplemental income. Ask the lender, but items could include:
Recent pay stubsW-2 formsBank statementsTax returnsBank or credit union account numbers
Property Information
Home information you may need includes:
Estimated property valueA copy of the property’s deedTrust agreement, if anyMortgage statementTax assessmentCurrent dues, taxes, insurance, and lien information for all real estateOriginal property purchase price and dateWhen the home was builtInformation on any liens you want or need to pay off
How To Apply for a Home Equity Loan
Start by comparing different home equity loan types and their advantages and disadvantages. Then work with the lender, who will likely ask you for:
Requested loan or line of credit amountAn overview of how you plan to spend the loan or line of creditType of loan you want (home equity line of credit or home equity loan)Any other creditor/financial obligations, including names and account balancesCurrent mortgage information and payment
You can apply over the phone, with an online application, or in person at a bank. Gather the required documentation, submit your application, and await a response. Remember, better preparation will likely lead to a smoother process.
