A home equity loan can give you the financial flexibility to live your life unfettered. Whether you want to consolidate bills, take a vacation or save for a rainy day, a home equity loan can accomplish your goals. Of course, all of that is moot if you don't qualify. You need to find the right lender and start the process to see if you qualify.
The first thing a lender needs is an application. You fill out all your pertinent details, including your personal information, your employment information and a description of your collateral. After you submit the application, the lender sends you disclosures within three days. These include a Truth-in-Lending Disclosure describing the terms of the loan, a Good Faith Estimate of closing costs, and a privacy disclosure. You are required to sign and return these prior to closing.
The lender must verify your income to show that you can afford the loan. You typically need to provide two years of W-2 forms, federal tax returns and your most recent pay stub. The application authorizes the lender to run your credit report, which it uses, along with your financial information, to calculate your debt-to-income ratio. It wants to see that no more than 40 percent of your income is allotted to debt payments.
The lender needs to see that you have equity in your property, so it will get an appraisal or some form of property valuation. Typically, the lender does not get a full appraisal, though. Instead, it often opts for a less expensive ride-by where the appraiser assesses the value of the property from the exterior only. The lender may also use a desktop appraisal, in which a computer program assesses value based on your address and comparable sales. Whichever method it uses, the lender wants to see that you don't exceed borrowing 80 percent of your home's value.
You are required to protect the bank's interest in your property against loss. Before you close, you need to provide proof of insurance in the amount of the loan plus any additional liens. So if your first mortgage is $250,000 and your home equity loan is $25,000, you must show total coverage of $275,000. You must also have the bank named as mortgagee. If your home equity is with a different bank from your primary mortgage, the equity lender must be added as second mortgagee.
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