How to get a home equity loan

How do you qualify for a home equity loan?

You may have heard that home equity loans are a great way to manage debt, pay for home improvements or even finance a large expense, like a wedding or a dream vacation.

When looking for a home equity loan, it’s important to know the basics of how the loan operates, what you’ll need to qualify and why this type of loan would be a sound choice for you and your family. This guide aims to introduce you to these topics so you can feel confident when you discuss loan options with a lending expert.

Get prepared by learning more about home equity loans, and be sure to learn about the great things you can do—or are already doing—to help you get the best possible loan options.

What is a home equity loan?

A home equity loan (HEL) is a fixed loan that is secured by the equity in your home. Your home’s value, your current mortgage and the equity you have in your home are the biggest factors in determining whether or not you will qualify for a loan.

A HEL uses your home as collateral and requires that you have equity in your home. In simplest terms, you have equity in your home if it is worth more than you owe on your mortgage. You can often use that equity to borrow money.

For a home equity loan from Discover® Home Loans, you’ll need to use the home that you live in as your primary residence. Examples of primary residences include condos, townhomes, single-family homes and some planned unit developments.  Unfortunately, Discover can’t use an investment property, commercial property or manufactured homes for a home equity loan.

Are there benefits to a home equity loan?

Some of the most common benefits include:

• Interest rates are typically lower than those on credit cards and other unsecured debts 
• Fees vary by lender, but Discover Home Loans has no application, origination, or appraisal fees, and no cash is required at closing
• Interest on a home equity loan may be tax deductible depending on how the loan is used and your particular circumstances. Consult a tax advisor to see if you qualify.
• Budgeting is manageable due to a fixed interest rate, fixed term and fixed monthly payment 
• Money is received in a lump sum
• Home equity loans can be used to improve your home, consolidate debt or pay for major expenses.

Determining eligibility and equity

Requirements for each loan and lender can vary, but there are some guiding principles that you can follow to see if you’ll qualify for a loan. You will typically need:

• Sufficient equity in your home—amount needed depends on the loan amount you want 
• Credit score of at least 620 
• History of responsible credit usage (paying bills on time, etc.)
• Verifiable, consistent income

The equity in your home is the most common factor that puts a cap on how much you can borrow. Discover Home Loans offers fixed loans from $35,000-$300,000 with less than 90% CLTV, depending on your credit score.

To estimate the equity you have, you’ll want to subtract the debts secured by your home from its estimated market value. Often, that means subtracting your mortgage from your home’s value, but other loans might need to be considered too.

Learning home values and available options

Your home’s value plays a big role in how much you can borrow.

You’ll start the home equity loan process by providing an estimate of your home’s worth. We recommend you generate a market value estimate by reviewing recent sale prices of homes in your area that are similar to your own home. You can do this by looking at popular real estate listing websites that include information about recent home sales.

Your personal banker and the underwriters at Discover Home Loans will use a property condition report, the stated value you provide, an automated valuation model (AVM) and, in some circumstances, more detailed appraisals to determine the value of your home.

In those cases, an appraiser may need to visit your home to view its exterior. Sometimes, an interior appraisal might be required. If one is needed, you can schedule an appraisal time that’s convenient for you.

You may not have heard about the AVM before—AVMs use mathematical models based on listing trends, comparable home sales and home price changes. By looking at this information, a lender can get a good reading on your home, in addition to its projected value down the road.

How much money can you get with a home equity loan?

With a home equity loan, your borrowing ability is mainly based on the equity in your home and your credit history. The best way to test out your borrowing ability is to use a loan amount calculator from Discover Home Loans.

Online calculators provide a quick way to see how much money you might be able to leverage, but they may not reflect the final loan options you will qualify for. Your final loan terms will take into account an understanding of your credit and the current housing market, both of which may affect the amount of money that’s available to you. These considerations may also change your annual percentage rate (APR).

In general, APR is determined by your credit history, the loan amount you seek, the amount of equity you have and the repayment term of the loan. Longer repayment terms and higher loan amounts will typically raise your APR.

Get everything you need together

After running those basic calculations, you’ll have a good idea of how much you can borrow and what the general terms will be. Next, it’s time to get a firm offer. To make that process as smooth as possible, use this application checklist, and collect copies of the common documents mentioned below.

Forms you will need to apply for a home equity loan

• Personal and home information 
• Employment history for at least two years 
• Income for the past two years
• List of debts

Documents to send to your lender

• A recent pay stub 
• Homeowner’s insurance declarations page 
• Mortgage statement 
• Tax, disclosure and borrower’s authorization statements

What loan specialists will check with other sources

• Tax forms and W-2s 
• Home valuation
• Debts and liens

There may also be some special documents required if you’re paying off other debt, are self-employed or run a family business, in addition to other circumstances, like living in a flood zone.

Fill out the general paperwork for a loan application and provide the loan specialists with everything they ask for. That will increase the likelihood that a lender will determine you are eligible for a loan.

Steps to improving your qualification chances

Beyond providing the documents from the list above, there are some other steps you can take to improve your chances of qualifying for a home equity loan. These steps are part of a long-term plan and can be useful if you’re considering using a home equity loan to pay for a future expense.

Improve your equity

Take time to build your equity. Not only will higher home equity give you more to borrow against down the road, but it will make it easier for you to get a home equity loan if you want one for an amount that is notably less than your available equity.

Pay down your mortgage

Paying directly against your mortgage loan can help improve your long-term chances of getting a home equity loan and increase the amount that you will be able to borrow. Not only is it important to pay down your mortgage, you also want to pay your bills on time.

Work on your overall credit

Good credit can go a long way towards helping you get approved for a home equity loan. It can even help you get better rates. A positive credit history is typically required, so be sure to pay all of your bills on time, avoid going over your credit limits and only borrow what you need if you choose to take out other loans.

Show your payment skills

Part of the overall decision to provide you with a loan of almost any kind is the ability and confidence that you can repay it. Some of the best ways to show lenders that you’re a responsible borrower are by maintaining a consistent employment history or income, reducing expenses, and maintaining a low debt-to-income ratio.