A home equity line of credit allows you to tap into the equity in your home. If you put a large down payment down on the home or you paid off a significant amount of principal on your first loan, you may have equity. This equity is your money – you can consider it an investment. The money sits in your home until you sell it unless you take out a home equity line of credit. This second loan allows you to have access to the cash you accumulated in the home. The HELOC approval process is quicker than your first mortgage approval process and much less complicated.
Applying for a HELOC
You will have to provide the lender with similar information that you provided for your first mortgage. This includes personal identifying information as well as information about your income. The lender needs to verify that you are who you say you are and that your income is verifiable. Be prepared to provide your social security number, paystubs, W-2s, tax returns (if applicable), and information regarding your employer.
Once you provide the pertinent information to the lender, they will pull your credit. There is no set minimum credit score for a home equity line of credit. Each lender sets their own requirements. In general, most lenders do not provide HELOCs to anyone with a credit score lower than 620, but again, this varies. The lender also looks at several things on your credit report aside from your score. They determine the amount of debts you carry and how they compare to your income. They also look closely at your housing payment history to make sure you make your payments on time.
The lender looks at all of the information you provided along with your credit information to determine if you qualify for a HELOC. This process usually only takes a few days, but depends on the lender you choose.
Ordering the Appraisal
Almost every HELOC lender will require an appraisal. This helps them to determine the amount of equity you have in the home. Remember, this amount may differ from what you anticipated. The value of a home can change drastically over time. For instance, many areas took a large hit to their homes’ values during the housing crisis. Some areas are still recovering. This may mean that your appraisal comes back with a lower value than you anticipated. This is not true in all areas, though. You will not know until you have the appraisal in your hands.
Figuring out the Equity
Once the lender has the appraised value for your home, they can determine the amount of equity you have. They do this by taking the value of the home and subtracting any outstanding principal balance you have on your first mortgage. For example, if your home is worth $200,000 and you have a first mortgage of $100,000, you have $100,000 in equity. The HELOC lender then determines how much you qualify for in a home equity line of credit based on your income, employment, and current debts. Every lender allows different loan-to-value ratios. Some lenders allow as much as a 90% LTV, giving you access to almost all of the cash you accumulated in the home.
The HELOC Approval Process Timeline
Every lender differs in how long they take for the HELOC approval process. Some go through the process quickly, especially if you use the same lender who holds your first mortgage. Others take longer because they are going through your information for the first time. There are also some third parties involved in the process, which the lender cannot control. For example, the appraiser plays an important role in the HELOC approval process. The lender cannot determine the amount of equity you have in the home until the appraisal is complete. You play a role in this process as well because you need to be available in order for the appraiser to gain access to the home.
Other considerations in the time it takes to approve a HELOC is the amount of time the lender takes to obtain your mortgage payment history, if it does not report on your credit report. The length of time the title company takes to provide the title search also matters. Each of these parties plays a role in the HELOC approval process, either speeding it up or slowing it down.
The HELOC approval process will vary by lender. In order to secure the lowest rates and costs, you should apply with several HELOC lenders at once. This way you can compare the rates and costs, as well as the APR. This enables you to make an informed decision regarding the best choice for your home equity loan.