Mortgage Products

Requirements for a Home Equity Loan

Family in their home discussing taking out a home equity loan and what the requirements are

If you’ve been thinking of taking out a home equity loan but are not quite sure how home equity loan applications are evaluated, here is an overview of what you can expect and the items Discover® Home Loans with its home equity loans, reviews on each application. Upon submission, the basics we review include:

4 Home Equity Loan Requirements

  1. Credit Score
  2. Credit History
  3. Employment and Income Verification
  4. Sufficient Equity

To see how these factors will affect your loan amount and monthly payments, use Discover Home Loan’s home equity calculators.

Credit Score

Your credit score is typically an algorithm that is generally comprised of five facets of your credit past – Payment History (35%), Amount Owed (30%), Length of Credit History (15%), Types of Credit Used (10%) and Recent Inquiries / Accounts Opened (10%).

For Discover Home Loans (DHL), the minimum credit score requirement is 620. Also, the better your credit score, the more likely, the better your rate will be, although there is still dependence on your income and equity. Moreover, applicants with higher credit scores may be eligible to have equity at a Combined Loan-To-Value above 80%. Finally, Discover requires loan amounts requested above $150,000 to be only available to applicants with credit scores of 700 and above.

How to improve your credit score

First, be sure to make your monthly payments on time for all of your open accounts on a consistent basis, as each month may help you build your score.

Next, try to pay down your debt to lower your amount owed: by paying more than the minimum payment and limiting any new spending on your credit accounts, you can drive this factor down to help push your credit score up. As you pay down debt, don’t close any accounts with zero balances: you will keep the average age of your accounts high by keeping them open.

Finally, limit any new applications for credit or loans until you feel your credit score is sufficient to earn approval, as the number of hard inquiries on your credit report may push your score down.

Credit History

Credit scores are a direct result of your credit past amongst other factors. Late payments can stay on your credit report for up to seven years. However, more recent delinquencies may impact your score more than older ones.

How to improve your credit history

While healthy credit habits that limit spending and increase payments will likely contribute to better credit scores, be sure to request your free annual credit report and review it for any errors. You may also be able to work with your creditors to update the status of your account and sometimes remediate any negative reports of the past by calling your card issuer and negotiating hardship.

Employment and Income Verification

DHL will verify your employment and income information by reviewing your most recent W2 forms as well as your most recent paycheck stubs covering 30 days, if applicable. If you’re self-employed or receive income from other sources than an employer, DHL will ask for your most recent federal income tax returns. If you receive retirement or 401k income, DHL will review a retirement award letter or 401k distribution letter. See DHL's application checklist for a list of documentation needed during the application process.

How to improve your income qualifications

As your ability to repay is a prime consideration in your loan application, anything you can do to increase your income—whether through a promotion, raise, new job, or second job—can help, although you may need to provide a steady income at any new level for a period of 30 days or more.

Sufficient Equity

Another metric DHL uses to determine your qualification and interest rate is your combined loan-to-value ratio (CLTV).  CLTV is calculated by taking your existing mortgage balance(s) plus your desired loan amount, divided by your home value:

CLTV = (Loan Amount + Mortgage Balance) / Home Value

For the average applicate, DHL lends up to 80% CLTV, but depending on your loan amount and credit score, they may be able to go as high as just under 90% DHL will perform an evaluation of your property’s current market value using an Automated Valuation Model (AVM), Property Condition Report, and in some cases we will schedule an appraisal. DHL also reviews your mortgage statements.

Home equity loans can help you accomplish a number of things, including home improvement, debt consolidation, paying for your education or other major expenses, and even refinancing.

How to improve your available home equity

Your home’s equity measures your current home’s value and subtracts the amount remaining on your mortgage loan. To increase your equity, you need to either increase the assessed value of your home or decrease the amount remaining on your mortgage.

Increasing your home’s value doesn’t require a loan. You can put some sweat equity into your house by renovating kitchens and bathrooms or even improving the curb appeal by making some landscaping or simple DIY exterior improvements.

While each month of mortgage payments helps improve your available equity, putting more than the minimum towards your monthly mortgage bills can amplify the impact.To see the loan amount your current available equity will permit, visit DHL’s loan amount calculator.

Discover Home Loans offers loans from $35,000-$300,000. The factors detailed in this article will determine your interest rate. If you are interested in a home equity loan from Discover, talk with a Personal Banker today at 1-855-361-3435 to get a quote or apply online.

Documents required during home equity loan application

While your initial home equity loan application will ask you to submit some basic information to verify your identity and size your borrowing needs and current levels of equity and credit, your formal home equity loan application will require additional documentation to formalize your application. These documents may include:

  • Social Security number
  • Unreported debts or support obligations, like alimony and child support
  • Two years of prior employment history and your employer’s contact information
  • Evidence of your income for the past two years
  • Proof of homeownership and home insurance declarations page
  • Copy of your most recent pay stub
  • Current mortgage statement
  • Past two years of W-2 statements
  • An appraisal or valuation of your home
  • Evidence of existing debts and existing liens on your home

Alternatives to home equity loans

If you cannot meet the eligibility requirements to earn approval for a home equity loan and you cannot increase your equity, improve your credit, or increase your income, you may want to look into other financing options. While these options may not match the higher borrowing limits of home equity loans, you may be able to earn approval for funds.

Personal loans

While personal loans do not require you to have equity in your home, they will require healthy measures of credit and income. You can check out application requirements and learn more about how personal loans from Discover work by visiting the Discover Personal Loans website.

Credit cards

Revolving credit can help you pay off debt on a payment schedule but will feature higher interest rates than most home equity loans. 0% Intro APR cards allow you to transfer balances so you can repay credit card debt without adding interest during the promotional period. 

$0 Application Fees.
$0 Origination Fees.
$0 Cash Required at Closing.

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