What is the Process to Get a Home Equity Loan?
Getting a home equity loan can be a fairly painless process if you have done your homework (pun intended). Getting all your financial documentation in order can help expedite the process greatly, but knowing how the whole process works can help you even more. Before you start though, you must consider a few things to even qualify for a home equity loan.
You want to start the home equity process at least 30 days before you want to receive your money because the whole home equity loan process typically takes 30 to 45 days. Legally, you can't close until at least 12 days after you apply and have received official notice of your rights.
The Home Equity Loan Process
Step 1: Figure Out If You Qualify for a Home Equity Loan
You can't get a home equity loan if you don't have enough equity in your home. Figuring this out is fairly easy. Texas law states that what you owe on your mortgage plus any lien on the home can't be more than 80% of the market value for you to qualify for a home equity loan. You can check your county tax appraisal district for an estimate (a quick Google search should locate yours). We have included a handy equity calculator below.
Home equity loans on an investment property or vacation home aren't allowed in the state of Texas. According to Texas state law, the home you want to take the loan out on must be the primary residence of the borrower, with a valid Homestead exemption filed. If your home is divided into units, you can take a home equity loan out on if:
- you live in one of the units and
- there are no more than four units on the property
Step 2: Determine Your Financial Readiness
Lenders consider how healthy your financial history and credit is to determine if they want to approve you for a home equity loan. It is best to go into the process with a clean bill of financial health before you start. Things to consider:
- How good is your credit? According to the Fair Isaac Corporation (FICO), a good credit score starts at about 670. The higher your credit score, typically, the lower your interest rate will be and the easier it will be to qualify.
- Do you have a responsible credit history (paying your bills on time)?
- Of course, 20% or more equity in your home is required.
- Do you have a record of steady employment, including at your current employer?
- Debt-to-income ratio (DTI) under 45%. To get your DTI, add all monthly debt payments (credit cards, student loans, car loans, child support, mortgage payment, etc.) then divide by your total gross monthly income. Turn that number into a percentage, and you have your DTI.
Step 3: Determine How Much You Want to Borrow
The last two things you need to know before you start the process is how much do you want to borrow and how much of a monthly payment you can afford. This will help you determine what type of home equity loan is right for you. Most lenders will offer repayment terms of 5, 10, 15, or 20 years.
Now you are ready for the application process. Gather up the following documents to expedite the loan process. Documents you will need for your home equity loan application and closing:
- Social Security card
- Records of alimony or child support payment if applicable
- Paystubs (At least for the past 60 days)
- Latest mortgage statement
- Bank statements (at least for the past 60 days)
- Last two years of W-2 tax returns if self-employed, a schedule K-1 (Form 1065)
- Last two years of income tax returns
- Account statements from any account that is considered assets, such as stocks, bonds, mutual funds, retirement savings, etc.
- ID: driver's license or U.S. passport
- Proof of homeowner's insurance
- Current mortgage information
Step 4: Choose a Home Equity Lender
Even if you already have an idea of which credit union or bank you want to get your home equity loan from, it's still a good idea to search around for the best rates and deals. Credit unions typically offer better rates and lower fees for home equity loans and HELOCs. You can check out Credit Union of Texas' home equity loan rates and details here as a starting place.
Step 5: Complete a Home Equity Loan Application
Once you have chosen a reputable home equity lender, it's time to fill out your loan application. Most lenders will offer online applications or will help you fill out the application over the phone, which is why we recommend having all your documents ready.
These are the four basic things a home loan originator will ask you about:
- Your personal information
- Your existing mortgage
- Your new home equity loan
- The property you are borrowing against
A Note About Fees
Lenders can only take up to 2% of the loan's principal for their services. Although, there may be other fees at closing for required loan documentation (i.e., title search fee, origination fee, notary fee, credit report fee, lawyer fees, and document preparation fees). If you need a new appraisal, then you may have to pay for that, but depending on the amount you are borrowing, your county property assessment may be accepted instead.
Step 6: Coordinate Your Home Equity Closing Appointment
So, your paperwork went through, and you just received the Texas Home Equity Early Disclosure document. This document outlines the Texas guidelines for Home Equity Loans. Your loan originator will set a closing date, which is the day you'll sign all the loan papers and “close” the loan. Before closing, you will receive an itemized list of all the fees and costs, and your new monthly payment amount. Now you are ready to go in and sign. Signing your loan documents must be done in person. Also, the closing must occur at the permanent office of a lender, attorney, or title company and not at your local coffee house.
Step 7: Start Using Your Home Equity Funds
By law, you have a grace period of three business days to cancel without penalty or charge. The funds of your home equity loan won't be distributed to your home account until those three days are up. There is never a separate account the money goes into, it is direct deposited into your home savings or checking account. Once you get the money, that's yours do with as you choose. Your lender can't require you to apply any of those funds toward other debts not tied to the home equity loan.
Home equity loans can be paid off before the due date without penalty or extra charge. That being said, your lender must adhere to the agreed-upon pay off date and not make you pay it off early due to a decrease in your home value or you defaulting on another loan.