Can You Take Out a Home Equity Loan Before Owning a Home for a Year?

When you decide to apply for an equity loan shortly after owning a home, make sure you’re not biting off more than you can chew. If you don’t have a mortgage payment, lucky you, but if you’re among the many that do, make sure you can shoulder the load of an additional monthly payment. If you’ve thought about it and are ready, willing and able, contact lenders around your area to find the best deal possible. When you find one, it’s time to decide which type of equity loan is best for you.

There are two major types of home equity loans – fixed rate and line of credit. A fixed rate loan is good for immediate expenditures such as debt consolidation or home repair. If you’ve only owned the home for less than a year, these scenarios might not apply. The line of credit gives you funds available for a rainy day. You have a credit line that you can access with checks. You only pay interest on the money when it’s used and it’s available again as soon as you pay it back. This is handy if you don’t need money right away but want to be prepared if the need suddenly pops up.

You’ve thought about it and you’ve chosen the best loan for you. Now you have to qualify. When you fill out an application, you do two things. First, you provide W-2 forms and pay stubs so the lender can verify your income. You also authorize the lender to run your credit report to make sure you’ve paid debts on time -- and also to total up your monthly debts. The lender will take your gross monthly income and compare it to your monthly payments on expenditures such as mortgage, auto, student loan and credit card payments. Hopefully, if you got a mortgage when you bought your home last year, there shouldn’t be much more new debt showing up, because if more than 40 percent of your income is set aside for your debt, you will have a tough time getting approved.

In addition to the income hurdle, you also have to have enough equity in the property, because, after all, it is called a home equity loan. If you have owned your property less than a year with an existing mortgage, you may not have enough to qualify. However, if you own the property free and clear, you put down a sizable down payment or the property has appreciated in value significantly, you will have some room to borrow. Essentially, you can borrow up to a total of 80 percent of the value of the home, which includes any existing mortgage.