Crunching the Numbers on 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 travel overseas. Home equity loans have become a great choice for homeowners and it’s all thanks to the hard work you’ve put into paying for your home.
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 HEL 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 investment property, commercial property or manufactured homes for a HEL 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. Consult a tax advisor
- 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 also give you different options for improving your home, consolidating debt or paying for major expenses.
Determining Eligibility and Equity
Requirements for each loan can vary, but there are some guiding principles that you can follow to see if you’ll qualify for a loan. You’ll 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, such as paying bills on time
- 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-$200,000 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 HEL process by providing an estimate of your home’s worth. We recommend you create a market value estimate by reviewing recent sale prices of homes in your area that are similar to your own home.
Comparisons are often available from real estate agents in your area, as well as through many helpful websites such as Zillow.com and Eppraisal.com.
Your Personal Banker from Discover Home Loans will use these and other sources in their final appraisal of the value of your home. These elements often include a property condition report, the stated value you provide and an automated valuation model (AVM).
In some cases, an appraiser may need to visit your home to view its exterior. Only in very rare circumstances will an interior appraisal be required. However, if one is needed, you can schedule an appraisal time that’s convenient for you.
You may not have heard about the AVM, in which case, you are probably curious about how it works when it comes to valuing your home compared to an appraisal. AVMs use mathematical models based on listing trends, comparable home sales and home price changes. By looking at this information, you can get a good reading on your home, in addition to its projected value down the road.
How Much Can You Borrow?
With a HEL, 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.
Online calculators provide a quick way to see how much money you can leverage, but they may not reflect the final loan options you receive. 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 HEL
offer. To make that process as smooth as possible, use this application checklist,
and get copies of the documents mentioned below.
Forms you will need
- Personal and home information
- Employment history for at least two years
- Income for the past two years
- List of debts
Documents to send
- 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 to increase your chances of eligibility.
Steps to Improving Your Qualification Chances
Beyond meeting the qualifications and numbers, there are some other steps you can take to improve your chances of qualifying for a home equity loan. These steps arepart of a long-term plan and can be especially useful if you’re considering ahome 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’ll make it easier for you to get a HEL if you want a loan 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 HEL and increase the amount that you will be able to borrow. Not onlyis it important to pay down your mortgage, you also want to pay your bill ontime.
Work on your overall credit
Good credit can go a long way towards helping you get approved for a HEL. It can even help you get better rates. A positive credit history is typically required for a HEL, 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. Many of the repayment qualifications of a HEL can be found in other loans. Some of the best ways to show lenders that you’re a safe risk are by maintaining a consistent employment history or income, reducing expenses and maintaining a low debt-to-income ratio. Learn more about that ratio here.
Foremployment history, you may not need to stay with the same employer for a long time, but you should be in the same career field for at least two years. As for your debt-to-income ratio, it’s good to keep it below 36%.