It’s a good time to be a homeowner. A home equity loan can help you invest further in your most valuable asset or fund other important expenses. Here’s what you need to take out a home equity loan in 2023.
OPEN DOORS: HOME EQUITY LOAN REQUIREMENTS
If you own your house and have been working hard to pay down your mortgage for a while, you likely hold a significant chunk of equity in your home. This is the portion of your home’s value that you own outright, as opposed to what you still owe on your mortgage. Your equity will also have increased if your home’s value has risen since you bought it.
Your equity is a valuable asset, and you don’t need to wait until you sell your home to access this value. A home equity loan allows you to borrow money against the value of your ownership stake in your home and to repay this amount in tandem with your original mortgage.
Let’s take a look at how a home equity loan works, and what you will typically need in order to qualify for one.
HOW DOES A HOME EQUITY LOAN WORK?
A home equity loan lets you borrow money against the equity you have already built up in your home. It allows you to borrow a portion of your equity stake, depending on how much of your loan you have paid back and how much your home is currently worth. The loan is secured against your home itself, just as your mortgage is.
A home equity loan provides a valuable lump sum payout that can be used for anything you wish, although it is most valuable if reinvested in upgrades or renovations to your house itself to further boost the equity you are borrowing against. It also makes sense to invest in education, training, or equipment that will improve your income or open up new opportunities for you.
Home equity loans can be a good option for borrowing because they attract interest rates well below those of credit cards or personal loans. They are also available for terms of between five and 30 years.
Your home equity loan also needs to be paid back on top of what you already owe on your mortgage, meaning you are increasing your monthly debt load—possibly for years to come. And, if you fail to keep up on payments, you risk losing your home itself.
That said, if you are organized and committed to paying back your home equity loan, it can be a good source of affordable credit when you need it most.
UNDERSTANDING YOUR CLTV RATIO
How much you can borrow against your home depends not only on the available equity you have in your home but also on the combined loan-to-value (CLTV) ratio of your current mortgage and the loan you are now seeking.
What does this mean? When you apply for a loan, lenders will look not only at the outstanding balance of your mortgage but also at the amount you are seeking to borrow in your equity loan and compare this to the appraised value of your home.
For example, imagine you still owe $250,000 on your mortgage and you wish to borrow a further $30,000 in a home equity loan. Meanwhile, your home now appraises for $400,000. That would give you a CLTV ratio of 0.7 or 70%.
In practice, most lenders will not be prepared to offer you a home equity loan that will see your CLTV topping 85%, but it depends on several other factors as well. Let’s take a look at these.
WHAT DO I NEED TO GET A HOME EQUITY LOAN?
You can apply for a home equity loan at most banks, local credit unions, and at specialist commercial lenders. You should start with the same lender who extended your original mortgage, but you should also look at terms offered by other lenders. Community-based credit unions, in particular, are often set up well to extend good terms to their members.
Wherever you choose to apply for your home equity loan, there are a few things that lenders will want to take a good look at before extending credit on top of your existing mortgage.
The first thing most lenders will look at is your credit score, which can be easily accessed online. This will give a basic idea of how reliably you have repaid the money you have been lent in the past. You’ll need a reasonable to good credit score to qualify for most commercial loans.
Most lenders will also pull your full credit history, for details of exactly how you used the credit you have been extended in the past, including on your bills, credit cards, and any existing personal, student, or auto loans you might have. It’s important to check your credit report, dispute any errors, and take care of any outstanding payments before applying for a loan.
You’ll need to provide proof of your current salary with pay stubs or income tax details and you’ll need to convince lenders that your prospects for remaining employed—and hopefully increasing your income—are good.
Lenders will also likely want details about any other liabilities you may have. While this will include the personal, student, or auto loans noted on your credit report, it might also include things like child support or alimony payments.
For a home equity loan, your lender will also require extensive details about your mortgage if they do not already have this information on file.
Together with your credit score, lenders will also look closely at your debt-to-income ratio, which is simply how much you owe compared with how much you currently earn. This is a key measure of how much more debt you can handle. Most lenders prefer a DTI of 35% or lower for an original mortgage. For a home equity loan, some will consider a combined DTI above 40%.
Equity functions much like a down payment when applying for a home equity loan. The bigger the stake you already hold in your home’s value, the more you will be able to borrow, and on better terms. Most lenders will not lend you more than 80-85% of the value of your home, which means, realistically, you should hold at least 20% equity in your home before seeking a loan.
While these are the most important factors in determining whether you will be able to borrow against your home equity, there are several other requirements that must be met when you apply formally for your loan. These include:
- Proof of identity, in the form of a driver’s license or birth certificate
- Proof that you are living in the home you are borrowing against
- An appraisal, to establish the market value of your home
- Fees, including loan origination fees, processing fees, and appraisal costs
- Closing costs and points payments, which are usually deducted from the lump sum payout when your loan is approved.
BUILD FOR THE FUTURE WITH WASATCH PEAKS
A good mortgage on a beautiful family home is a great start in life. A home equity loan can help you get even more out of your original investment by providing valuable funds when you need them most for home improvements, education, or starting a family.
At Wasatch Peaks, we help families put down deep roots in our community by making sure you begin with a home equity loan tailored to your needs. Our home equity products allow you to tap into your home’s value with:
- Competitive interest rates
- Flexible terms and payment lengths
- High loan-to-value (LTV) ratios
As always, our products come with our trademark helpful and professional member service, because the better we understand your particular financial situation, the more we will be able to help you. Click below to learn more about how to apply for a Wasatch Peaks Credit Union home equity loan.