How to Apply for a Home Equity Loan

Before applying for any loan, it’s important to plan ahead in order to enhance your chances of fast approval at the best possible interest rate. If you borrow using a home equity loan, these basic steps can help you prepare for a successful loan approval process.

If you’ve applied for a home mortgage, you know that lenders require lots of information, even if you don’t have bad credit. Applying for a home equity loan is a similar process, and getting your documents together ahead of time can save you lots of time and trouble on that first step to getting to the closing table.

Document deluge

Here’s a list of necessary documents:

1. Tax returns and pay stubs. Be prepared to provide copies of your two most recent pay stubs, or two years’ worth of tax returns if you’re self-employed, as well as recent bank statements.

2. Real Estate Documents. A copy of your property’s deed, verification of the outstanding mortgage balance, and proof of homeowner’s insurance are typically required. Your lender will factor in the current balance on your first mortgage and calculate the loan amount that you’ll qualify for.

3. A New Appraisal. Applying for a home equity loan usually requires a fresh appraisal, since the market value of your home has most likely changed since you first purchased it. This will probably cost around $250 to $350.

4. Permission for the lender to run a credit check. You’ll need to pay for running the credit check; this bill should set you back about $25. While many loan application fees can be paid at closing, the credit verification fee is traditionally paid as an up-front, out-of-pocket expense. If you suspect that you have bad credit and can resolve it prior to your application, do so. It can help you get a lower rate, and thus save you lots of money in the long run.

Most lenders will only approve home equity loans for owner-occupied residential property. The maximum loan amount and rate will be based on your total loan-to-value (LTV) ratio, which lenders usually cap at 75 to 80 percent. To estimate your LTV, divide your desired loan amount by the appraised value of the property (minus the balance left on your first mortgage). The result will give you the loan-to-value ratio.

Taking the time to prepare the above documents will make the home equity loan process a smooth one.

Additional Home Equity Resources

Home Equity Loan Rates and Information [MortgageLoan]
Loan-to-Value (LTV) [Wikipedia]

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