One of the best ways to unlock equity in your home is to take out a home equity loan, also known as a HEL. Home equity loans are an attractive tool to finance a variety of goals, including home renovations, debt consolidation, college tuition, and even a car purchase. Here, we’ll review some basic home equity loan requirements. We’re based in Texas, and there are some specific laws covering home equity loans. We’ll cover some of that here, but be sure to check out our article that details Texas-specific home equity rules.
What is a Home Equity Loan?
A home equity loan is a way to unlock the equity in your home without having to sell your house. Instead, you can use your home as collateral to borrow money. With home equity loans, as opposed to home equity lines of credit (HELOCs) where smaller amounts can be withdrawn over time, the lender provides the borrower with a lump sum payment upfront. Home equity loans have fixed interest rates, so monthly payments on the principal and interest are made on a predictable installment plan for the length of the loan term.
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How to Qualify for a Home Equity Loan
In Texas, there are strong regulations in place to protect consumers. This means that the state has certain rules governing who qualifies for a home equity loan. If you meet the following requirements, a HEL could be a great way to access the equity in your home.
The 80 Percent Rule
In Texas, you can’t owe more than 80 percent of the market value of your home on your mortgage and your home equity loan combined. As an example, if you have a $200,000 mortgage against a home worth $400,000, the most you can borrow is $120,000.
($400,000 [Appraised Value of Your Home] x 80%) – $200,000 [Outstanding Mortgage Balance] = $120,000
If your mortgage balance is $321,000, a home equity loan is ruled out because the balance exceeds 80 percent of market value.
($400,000 [Appraised Value of Your Home] x 80%) – $321,000 [Outstanding Mortgage Balance] = – $1,000
One Loan per Year
You can only take out one home equity loan per year (regardless of whether you pay off the loan before then) and can’t obtain a secondary loan before repaying your primary home equity loan.
Primary Residence Rule
Your loan can only apply to the housing unit in which you live. You can’t take out a HEL on a second home or rental property.
Minimum Credit Score
Many lenders will require a minimum credit score before agreeing to issue a home equity loan to a borrower, typically somewhere around 600. Interest rates and terms improve with scores above that level.
Documents Required for a Home Equity Loan
If you qualify for a home equity loan, there are several documents you’ll need to gather to support the application itself.
- Most recent pay stub. This should reflect your year-to-date earnings for at least the last 30 days.
- W-2 and 1099 forms. Be sure to include these forms from the most recent tax year in your application. Copies from online are typically fine if they include the employer and employee names and dates of employment.
- Pension statement. You should provide proof of any income you receive from Social Security, disability, death benefits, your pension, or your retirement funds.
- Personal tax return. You’ll typically only need this if you’re self-employed or receiving income not noted on your W2, such as rental income.
- Business tax return. This is typically only necessary if you have 25 percent or more ownership interest in a business.
Information About Your Home
- Mortgage statement. You need documentation of your most recent mortgage statement that shows the account number, information about all lien holders, your current mortgage payment amounts, and the balance owed.
- Homestead application. Provide proof of your approved homestead application.
- Proof of HOA dues. If applicable, your lender will want to see any annual dues paid to a homeowners’ or condominium association, along with contact information for property management and a copy of its most recently approved company budget.
- Insurance policies. Since your home will be used as collateral for the loan, your lender will want to ensure it’s well-insured. Bring copies of your homeowner’s and flood insurance policies that show current coverage and confirm the address.
- Secondary mortgage statements. If you own other properties, the lender needs to see those mortgage statements, as well as lien-holder information and insurance information. You’ll also need to provide your most recent property tax statement.
Other Necessary Information
- Proof of Identity. To prove you are who you say you are, the lender will require a copy of your current (unexpired) driver’s license, resident alien card, or visa. Any ID you provide must include a photo. If you use your resident alien card, it can’t be set to expire in the next six months. Meanwhile, with a visa you must also bring the official sponsor letter, typically signed by your spouse or employer.
- Letters of explanation. Unique to a home equity loan, you’ll need to provide signed separate signed letters of explanation outlining the following (if these apply): the purpose of the loan, any reasons for inquiries on your credit report within the last 120 days, any address variations showing up on your credit report in the past two years, any reasons for derogatory listings on your credit report, and reasons for additional Social Security numbers on your credit report.
What to Expect When You Apply for a Home Equity Loan
Now that you know what you need to qualify and apply for a home equity loan, you should also be aware of the timeline for approval and the requirements placed on lenders in Texas.
- Takes at least 30 days. Generally, the entire process of applying and receiving your lump sum home equity loan amount will take at least 30 days. Take this timeline into consideration if you need the money by a specific date.
- Front end fees. There are some fees associated with a HEL, but these front-end fees can be worth no more than 2% of loan principal. However, it’s important to note that survey, appraisal, and title fees are not included in this calculation.
- Only the home can be collateral. In Texas, lenders can’t require any other assets besides the home to be used as collateral.
- Fixed loan term. A lender cannot require a home equity loan to be repaid earlier than agreed upon.
- No prepayment penalties. Lenders can’t penalize you if you decide to pay off the loan early.
Ready to Apply for a Home Equity Loan?
Home equity loans can be a great way to achieve certain goals. With lower interest rates than other types of loans and a fixed repayment schedule, HELs can provide a way to fit large purchases into your household budget. If you think a home equity loan is right for you, apply today at Amplify Credit Union.