Home equity loans are secured using the value of a home as collateral. Homeowners will often utilize a home equity loan for major expenses, home improvements or repairs. From start to finish, the home equity loan process will take approximately 30 – 45 days, and will require income, debt and credit documentation on behalf of the borrower. When taking the steps to be approved for a home equity loan, there are certain measures to consider before and during the application process.
1) Check your credit
Before applying for any type of real estate loan, it’s important for homeowners to check credit ratings and scores. Since home equity loan rates are often determined by an owner’s credit rating, the better the rating, the more attractive the rates and terms will be. “Good credit” is having a FICO score exceeding 680 points. If your credit score falls below that margin, speak to a loan officer about credit improvement strategies before applying.
2) Use your mortgage lender
Your mortgage company is one of the best places to begin the home equity loan process. Your current mortgage holder has the most up to date tax appraisal information on a property, which allows them to ballpark the likelihood of a loan approval based on the minimum amounts of equity required. In addition, most major mortgage companies will offer attractive rates and discounts to current customers with a solid payment history.
3) Get an appraisal
A bank appraisal will be required in a home equity loan approval. The lender wants to make certain that the homeowner has at least 20 percent equity in a home before they issue a loan. While the appraisal is often part of the application process itself, taking the initiative and hiring an appraiser before applying can be beneficial, and speed up the time it takes to close. Make sure that the appraisal you are getting, however, matches up with the specifications for a home equity loan and not a new purchase, as the requirements often differ. In most geographic areas, an appraisal will cost between $300 and $500 out of pocket.
4) Don’t make any major purchases
During or 30 days before an application for a home equity loan, applicants should not take out new sources of credit. This includes credit cards, appliance loans or car loans. New loans will lower a borrower’s credit score, and could hurt the approval for a home equity loan.
5) Save up for closing costs
Home equity loans come with closing costs of around three percent of the total loan amount. Homeowner’s should anticipate this, and do their part to save up those funds in cash to have available for closing.