How to Get a Home Equity Loan
So, you’ve decided to get a home equity loan. Maybe you need the money to remodel your bathroom or kitchen, or your kids are going off to college and you need a little extra for tuition, or an unexpected medical expense came up – whatever it is, a home equity loan can definitely help.
Generally speaking, a home equity loan is the right choice for people who need cash for a single major expense; home equity loans are probably not the best choice if you need to borrow a small amount of money (say, under $5,000).
You may have also heard of a home equity line of credit. What’s the difference between a home equity loan and home equity line of credit? With a home equity loan, you get the money you borrow in one shot, in a single lump sum payment and the interest rate is fixed over the life of the loan. With a home equity line of credit or HELOC, you can withdraw money multiple times until you reach the total amount of your credit line. But unlike a home equity loan, a HELOC usually has an adjustable interest rate which can go up or down depending on the prime rate.
How Do You Get A Home Equity Loan?
The first thing you need to get a home equity loan is to find out how much equity you have in your home; that’s the difference between your home’s market value and how much you still owe on the mortgage loan.
When you apply for a home equity loan:
- First, you’ll complete a home equity loan application with your lender of choice
- You’ll need to provide proof of your identity and that you actually own your home
- The lender will pull your credit report and review your monthly payments
- The lender will determine your available home equity and whether the loan amount you’re requesting is within the state of Texas’ maximum LTV (loan-to-value) ratio.
- The lender will also calculate your debt-to-income ratio (DTI); that’s your total monthly payments for housing and debt (not normal living expenses like food and utilities) divided by your total before-tax income
- You’ll need to prove your income; lenders analyze your income using either your tax returns (if you’re self-employed, have lots of investments, or work on commission) and/or your W-2s and pay stubs; you’ll need pay stubs for at least the past month, two years of tax returns, and three to six months of bank statements