Getting approved for a home equity loan allows homeowners to tap into the equity they have built up in their home. This type of financing can be useful for consolidating high-interest debt, funding home improvements, or covering major expenses. However, being approved requires submitting an application and meeting eligibility criteria set by lenders. One key part of the process is providing the right documentation to verify your finances and collateral.
In this comprehensive guide, we will walk through exactly what documents you need when applying for a home equity loan Having these materials ready can help streamline the application process and improve your chances of approval
Overview of Home Equity Loans
Before diving into the documentation, let’s quickly summarize what a home equity loan is and how it works A home equity loan is a type of second mortgage that allows you to borrow against the equity in your home.
Equity represents the current market value of your home minus what you still owe on your existing mortgage. For example, if your home is worth $300,000 and you owe $180,000 on your first mortgage, you have $120,000 in equity.
With a home equity loan, you can access a portion of that equity – generally up to 85% – in a lump sum. You will pay back the loan over a set repayment term, usually between 5 to 30 years, at a fixed interest rate. Your home acts as collateral for the loan.
The benefits of home equity loans include:
- Lower interest rates than unsecured loans
- Fixed payments that don’t fluctuate
- Possible tax deduction on interest
The drawbacks include:
- Closing costs
- Risk of foreclosure if payments lapse
- Lengthy application process
Now let’s look at what you need to provide when applying.
Personal Identification Documents
To start, lenders will need to verify your identity and residency. The most common forms of ID requested include:
- Driver’s license
- State ID card
- Passport
- Permanent resident card if applicable
Providing a current, valid government-issued ID helps confirm you are who you claim to be. Make sure the ID you submit matches the personal details provided on your application.
Income Verification Documents
Since lenders want to see you have the means to repay the home equity loan, you must supply documents to validate your income sources. The specifics can vary depending on your employment status:
-
Employed applicants should provide recent pay stubs going back at least 30 days. A copy of your W-2 from the previous year can also help.
-
Self-employed borrowers will need to provide two years of personal and business tax returns. You may also need to supply bank statements proving revenue deposits.
-
Retirees relying on pensions or social security will want to submit award letters, 1099 forms, or other documentation with income details.
Your gross monthly income, before taxes and other deductions, is used to calculate your debt-to-income ratio. So accuracy here is important.
Bank Account Statements
Most lenders will request current bank account statements, typically from the last 2-3 months. The statements should show consistent income deposits that align with the amounts on your other income documents. Account balances are also reviewed to verify your cash flow and liquid assets.
Any large deposits or withdrawals will need to be explained to avoid misrepresentation of your true financial status. Make sure to save digital or physical copies of recent statements for all your checking, savings, and investment accounts.
Credit Report and Score
Your credit report and score are key factors that determine loan eligibility and pricing. Before submitting your home equity loan application, it’s wise to check your current credit report for errors and your credit scores through a site like Credit Karma to understand where you stand.
As part of the application process, you will need to provide written permission for lenders to access your credit reports and scores from the three main bureaus – Experian, TransUnion, and Equifax. This allows loan underwriters to evaluate your creditworthiness based on your past borrowing and repayment history.
Higher scores in the good to excellent range (670 and up) will qualify you for better loan terms. If your credit needs improvement, you may want to wait to apply.
Home Value Documentation
Since your home collateralizes the equity loan, lenders need to verify its current market value. This is done through a professional home appraisal performed by a third-party appraiser. You will need to grant the lender access to your property for this appraisal.
In some cases, if a recent appraisal was already completed, such as when refinancing your existing mortgage, the lender may accept the past report. However, expect that a new appraisal will take place before the home equity loan closes.
Existing Mortgage Details
Your first mortgage details will be needed to determine the amount of equity available to borrow against. Supply a current mortgage statement showing your original loan amount, current balance, and additional details like the interest rate and term length.
You may also need to provide contact information for the servicer. Account numbers, property tax details, and home insurance information are standard requirements as well.
This shows the lender your remaining mortgage obligation so they can accurately calculate your equity position and loan-to-value ratio.
Other Debts and Obligations
To get the full picture of your financial situation, expect to list out all your current debts with details like the creditor names, account numbers, balances owed, and minimum monthly payments. This includes:
- Auto loans
- Student loans
- Credit cards
- Personal loans
- Child support or alimony
- Existing home equity loans/lines of credit
- Any other debts reported on your credit report
Debts that do not show up on your credit report but that you pay regularly should also be disclosed, such as gym memberships, subscriptions, childcare expenses, and so forth. These obligations factor into your debt-to-income calculations. Being thorough allows the lender to make accurate assessments.
Paperwork for Any Assets or Income Sources
Do you have additional assets or income streams beyond the standard ones? For example, you may have:
- Rental income from investment properties
- Stock portfolio assets
- Proceeds from a legal settlement
- An ownership stake in a business
- Retirement accounts
Any extra sources of income or assets could help strengthen your application. Be prepared to provide documentation to back up claims about these additional resources, such as recent tax returns showing rental income, brokerage account statements, business financial statements, copies of legal documents for settlements, and so forth.
The more complete information you supply, the easier it is for underwriters to verify your finances.
Home Equity Loan Needs and Usage
Although lenders do not always require this, including a clear explanation for why you need the home equity loan and how you plan to use the money can improve your chances of being approved. Underwriters want to see you have a reasonable need for the loan and do not plan to use it for overly risky purposes. Be prepared to briefly describe:
- Why you want the home equity loan
- How much you plan to borrow
- How you will use the funds
- How you will repay the loan
This information demonstrates you have put thought into the decision and understand the responsibility of borrowing against your home equity.
Documentation Speeds Up the Process
Coming prepared with all the required documentation helps streamline the underwriting process and prevents hold ups. While it may seem like a lot of paperwork, having your financial life in order makes getting approved much simpler.
Follow the lender’s documentation checklist closely and submit everything promptly when applying for your home equity loan. With all your information readily available, you can get funded faster and begin putting your equity to work right away. Just make sure to carefully review all loan terms before signing anything.
Home equity application preparation: Your new home equity loan
Before starting a new home equity loan application, you have to do research about the different products available. Youll also want to have made decisions on the type of loan you are taking out and what you will be using it for. Make sure you have thought about the following things:
- The loan product you want to apply for: Lending limits, interest rates and repayment terms vary from one loan to the next. Make sure you have decided what you are asking to borrow and how youd like to pay it back.
- The purpose of the loan: Your lender will need to know if you are taking the loan to purchase a home, fund a home improvement project, refinance an existing loan or for something else. Be prepared to give an overview of your spending plan.
- Co-applicant information: If someone is going to be assuming the same responsibility for the loan as you, you need information about his or her employment and residential status.
- Promotional rates or information from your lender: If you want any special terms applied to your loan, make sure you have the details ready at the time you fill out your home equity application.
Be prepared to complete your application with our home equity checklist
Starting the application process is simple. Just answer a few questions online and one of our Home Equity Specialists will contact you by the end of the next business day to follow up. At that point, they will walk you through the completion of your application, so youll want to have all the necessary information readily accessible. For this reason, consider collecting the requirements listed on this checklist as soon as you complete the online contact form.
Is it Hard to get a HELOC? – Minimum Requirements and How to Get Approved
What are the requirements for a home equity loan?
The requirements for a home equity loan include having enough home equity, maintaining a reasonable debt-to-income ratio, demonstrating a good credit score, providing financial documentation, and having funds for closing costs. An important requirement for a home equity loan is that you have enough equity in your home.
What are the requirements for a home loan?
Some requirements are: Home equity: You must have home equity. Equity is the difference between how much you owe on your mortgage and the market value of your house. The amount you can borrow depends on the lender, your credit history, and other factors, and can be as much as 95% of the equity in your home.
What documents do I need to apply for a home loan?
For applicants who only have (or have some combination of) self-employed, supplemental, or retirement incomes, lenders may ask for two consecutive years of personal federal income tax returns, two years of rental history, award letters, insurance policy documents, or other documents.
What credit score do you need for a home equity loan?
Credit score: At least 620 In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a home equity loan with bad credit.
How do lenders determine if you qualify for a home equity loan?
To determine whether you meet the equity criteria, lenders typically use metrics such as the loan-to-value ratio (the mortgage balance relative to the value of your home) and the combined loan-to-value ratio (CLTV, which accounts for all loans on the property). Lenders typically approve home equity loans with an LTV or CLTV of up to 85%.
What are home equity loan requirements & HELOC requirements?
Regardless of which type of loan you choose, home equity loan requirements and HELOC requirements tend to follow these standards: Equity is the difference between how much you owe on your mortgage and your home’s value. This determines your loan-to-value ratio, or LTV.