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How to get a home equity loan and tap your house for cash

October 6, 2022, 5:51 PM UTC
Family sitting in front of their home
Home equity loans offer an upfront, lump-sum payment that you’ll pay interest on throughout your entire loan term.
Photo illustration by Fortune; Original photo by Getty Images

Home equity loans let you turn the equity you have in your property into cash

Here’s how it works: You’ll choose a lender and apply for a loan just as you would a traditional mortgage. You will also need to get your home appraised to determine its current value, as this helps the lender gauge how much equity you have and the total amount you can borrow. Finally, you’ll close on your loan and receive a lump-sum payment a few days later.

You can use the proceeds from your home equity loan however you like. Many homeowners use them to pay for renovations or repairs, though they can also be put toward college tuition, medical bills or even paying off higher-interest debts, among other expenses.

Requirements for home equity loans 

The exact requirements for a home equity loan vary by lender, but at the very least, you can expect to need 10% to 20% equity in your home. 

To calculate how much equity you have, you first need your home’s market value. Once you apply for the loan, your lender will order an appraisal to get an official number, but at this stage, you can ask a local real estate agent or check with your appraisal district. They should have an estimated market value on file for your home.

Then, subtract the balance you have remaining on your current mortgage. For example, if your home is valued at $400,000 and your mortgage balance is $300,000, then you have $100,000 in equity or 25% (100,000 / 400,000 = 0.25).

In addition to this, you will also need:

  • At least a 680 credit score, though some lenders may require a higher score
  • A debt-to-income ratio (DTI) or 45% or less, meaning your total debts—including the new home equity payment, come to less than 45% of your monthly income
  • A loan-to-value ratio of 80% to 90%, including both your existing mortgage balance and your requested home equity amount

Keep in mind that while some lenders may still consider some applicants with lower credit scores, these scores may not qualify you for maximum financing. You also may pay a higher interest rate if your score is on the low end, as this compensates the lender for your extra risk.  

How to get a home equity loan 

If you’re a homeowner in need of cash, a home equity loan may be an option to explore. Follow the below steps to get started.

1. Determine what you need—and how much you can borrow

Home equity loans offer an upfront, lump-sum payment that you’ll pay interest on throughout your entire loan term. To minimize these interest costs, it’s important to only borrow what you need.

As Bryan Toft, chief revenue officer at Sunrise Banks, puts it, “Do your homework first. Find out how much of a loan you need, what your interest rate might be and make sure you’re only taking out a loan that you can afford.”

Try to be as accurate as possible when estimating your costs. If necessary, you might want to get quotes from contractors (if you’re doing renovations, for example) or bring in other experts to help you hone your estimate. The more accurate you are, the more you can minimize your long-term interest.

You will also need to determine how much you can borrow from your house. To do this, you’ll again need your existing mortgage balance and your home’s current market value (you can ask a real estate agent or check with your local appraisal district for this).

Most lenders will let you borrow up to 80% to 90% of your home’s value, minus the balance on your current loan. So if your property is worth $600,000, and your mortgage balance is $350,000, you could potentially access $190,000 (600,000 x 0.90 – 350,000 = 190,000).

“In order to qualify for a home equity loan, you have to have equity built up in your property,” says Jon Giles, head of consumer direct lending for TD Bank. “So, it may not be the best option for a newer homeowner that didn’t put a substantial amount of money down during the purchase process and hasn’t lived in the home long.”

Keep in mind: You won’t necessarily qualify for the maximum amount a lender offers. Your credit score, DTI ratio, and other financial factors will also influence how much you can borrow.

2. Research lenders 

Many lenders and banks offer home equity loans, but their requirements, terms, fees, and limitations can vary from one to the next. Because of this, it’s important to consider at least a few options before deciding which company to proceed with.

When researching lenders, you’ll want to consider:

  • Any eligibility requirements, including maximum DTI ratios, credit score minimums and how much equity you need in your home.
  • Any minimum or maximum loan amounts the lender may have
  • Their rates and fees, including application fees, origination fees and underwriting fees

The Federal Trade Commission (FTC) recommends starting your search with your current lender or bank, as they may offer discounted rates or fees. You should also consider a few other financial institutions, making sure to get details regarding their fees, payment terms and any prepayment penalties.

You can keep track of the lenders you consider using this home equity shopping worksheet. Don’t be afraid to show lenders what others have offered you. They may be open to negotiating terms and fees to win your business.

3. Apply for the loan

When it comes to home equity loans, “The application process is the same as a first-lien mortgage,” according to Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

That means—just like on your first mortgage loan—you’ll need to fill out your lenders’ application, agree to a credit check, and submit various forms of financial documentation. These include:

  • Paystubs
  • Bank statements
  • Statements for any assets or retirement accounts you have
  • W-2s
  • Tax returns

There may be other requirements, particularly if you’re self-employed. This might include a profit and loss (P&L) statement, a balance sheet, and business bank statements. Make sure to stay in touch with your loan officer and respond to any document requests quickly, as any delays could slow down your application. 

4. Have your home appraised

Your home’s value plays a key role in how much equity you have—and how much you can borrow using a home equity loan. As such, you can expect your lender to order an appraisal of your property after you’ve submitted your application.

“There is a common misconception that a person’s home equity is only the amount of their initial down payment when they bought the home,” says Shmuel Shayowitz, president of mortgage lender Approved Funding. “This is definitely not the case, and all lenders and banks will use the current appraised value of your home.”

There are several types of appraisals, including full appraisals, in which a professional appraiser will physically evaluate your home inside and out; drive-by appraisals, which combine a curbside look at your home with property records and sales data; and desktop appraisals, which use only records and sales data to assess your home’s value. The type of appraisal your home will need depends on the lender.

5. Close on the loan and receive your money

Finally, you’ll receive a closing appointment, which is when you’ll sign your loan paperwork, pay any fees, and finalize your home equity loan.

All in all, the whole process can take anywhere from two weeks to two months, according to Cameron Findlay, chief economist at AmeriSave Mortgage Corp.

“Factors that affect the timeline include how well you’ve prepared all the necessary documents, the efficiency of the underwriting process and whether you will need to provide supplemental information,” Findlay says. “If your loan requires an in-person appraisal, the availability of the appraiser can also come into play.” 

Once you’ve closed on your loan, there is a mandatory three-day waiting period in case you want to cancel. After this passes, your lender will issue your full, lump-sum payment. 

The takeaway 

Getting a home equity loan works much like applying for your first mortgage did. You will research lenders, apply for the loan, provide documentation and have your home appraised. Once all is said and done, you’ll receive your funds—which you can use for any purpose you like—within a few days.

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