How Hard Is it to Get a Home Equity Loan? (2024)

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Is it hard to get a home equity loan?

It is fairly easy to get a home equity loan, as long as you meet a lender's eligibility requirements. Credit unions, banks, and online lenders all have different loan requirements for borrowers, including a minimum credit score, a sufficient debt-to-income (DTI) ratio, and home equity of at least 20%.

Read on to learn more about how hard it is to get a home equity loan

At Credit Union of Southern California (CU SoCal), we make getting a home equity loan easy.

Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.

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What is a home equity loan?

A home equity loan lets you borrow money from the bank against the equity of your home. The amount is determined by the difference between your house’s market value and the remaining mortgage credit. If you are approved for a home equity loan, you can use the money any way you choose. Some common uses for a home equity loan are making home renovation, paying for emergency medical bills, and paying off high-interest debt.

Eligibility requirements for home equity loans

All lenders have loan eligibility requirements, which fall into these main categories, with some differences as to the specific numbers. It may be hard to get a home equity loan if you cannot meet these requirements:

Equity. Home equity is the dollar amount or value of the home that you own based on how much you owe on your mortgage and any other secured loans that use your house as collateral. Most lenders require home equity of at least 20%.

Credit score. While some lenders may accept a credit score of at least 680, some lenders may require a credit score of 720 or more.

Debt-to-income (DTI) ratio. DTI is a comparison between your income and your monthly debt payments. A low DTI ratio indicates to lenders that you are low risk and can likely afford to make your payments to your current mortgage payments, your other major debts, in addition to a new home equity loan.

Loan-to-value (LTV) ratio. LTV is a calculation made by lenders to assess the risk of giving a mortgage loan, home equity loan or home equity line of credit (HELOC). The LTV compares the amount of the loan to the value of the property. LTV = (the amount of the loan ÷ Appraised value of the property) × 100. Lenders typically look for an LTV of 85% or less for home equity loans. For example: A loan amount of $200,000 ÷ an appraised home value of $400,000 x 100 = 50% LTV.

Income. The income part of the debt-to-income (DTI) ratio is essential to getting approved for a home equity loan, which is considered a second mortgage. Lenders must be confident you have the income to repay the loan.

Solid repayment history. If you have missed payments or made late payments on your current mortgage this activity will likely be indicated on your credit reports. Lenders may not provide new loans to homeowners who have a poor history of loan repayment.

Proof of homeowner's insurance. Homeowners who have a mortgage are required by lenders to have homeowner's insurance. If you do not have a mortgage you will need to get a homeowner's insurance policy to get approved for a home equity loan.

What if I don't qualify for a home equity loan?

If you don't qualify for a home equity loan there are some strategies you can take to improve your financial position, including:

• Pay bills on time. If you're credit score is too low due to late bill payments, simply paying your bills on-time can improve your credit score.
• Reduce debt. Paying down or paying off your credit card debt or other loans will reduce your debt-to-income ratio.
• Avoid new credit applications. If you intend to apply for a home equity loan, taking on new credit may affect your credit score and add to your DTI ratio
• Focus on increasing equity. Making additional mortgage payments to the principal balance of your existing mortgage will increase your equity.

Home equity loan alternatives

If you've been turned down for a home equity loan, here are some alternatives borrowing options:

• Personal loan. A personal loan is a loan granted to an individual based in their creditworthiness (not collateral) and is sometimes called an “unsecured loan” (since no collateral is used to secure the debt). Personal loans can be used for any type of expenses you choose.
• Credit card. If you need extra money in the short term, credit cards are easy to get. Many credit cards offer a promotional 0% APR (annual percentage rate) for a fixed period, usually 12 months.
• Cash-out refinancing. A cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The extra cash is given to you at closing. If you have a low interest rate on your mortgage, refinancing to a higher interest rate just to get access to cash, is probably not a good idea.
• 401(k) loan. who have worked for an employer have a 401(k) retirement savings account. Your 401(k) plan may allow you to borrow from your account balance; however, certain loans may be treated as taxable distributions. If a distribution is made to you before you reach age 59½, you may have to pay a 10% additional tax on the distribution. Check with your employer and a tax advisor before taking a loan from your 401(k).

How long does it take to get a home equity loan?

Getting a home equity loan can take anywhere from two weeks to two months, depending on your preparation of documents, your financial situation, and state laws.

What can you use a home equity loan for?

Home equity loans can be used for anything; however, home equity loans are best used for making purchases that increase your home’s value or improve your financial situation. Some examples of home equity loan uses include home renovation, paying emergency medical bills, renovating your home, or paying off high-interest debt.

How long are home equity loan payment terms?

A home equity line of credit is (HELOC) comes with a draw period during which the line of credit is available for withdrawal, and a repayment period that starts when the draw period ends. Draw periods range from five to 10 years, and repayment periods are typically as long as 20 years, for a total of 30 years loan term.

How do home equity loans compare to HELOCs?

There are several differences between a home equity loan and a HELOC. A home equity loan provides the loan amount to the borrower in a lump sum, which they then need to pay interest against. Most home equity loans have a fixed interest rate that’s charged on the entire lump sum amount, but home loans are also available with variable interest rates as well. A HELOC grants homeowners access to a certain amount of money during a draw period and typically has a variable interest rate that’s charged only against the amount of money that’s withdrawn.

Why would a home equity loan be denied?

Some people find that it is hard to get a home equity loan. You could be denied a home equity loan if you are unable to meet a lender's eligibility requirements. Shop several lenders, especially credit unions which may have more flexible requirements.

Are home equity loans worth it?

While there are home equity loan pros and cons, one main advantage of getting a home equity loan is access to a large sum of cash. Another advantage is a fixed interest rate, which means predictable payments. Additional home equity loan benefits include a relatively easy and quick application process. Plus, if you utilize the funds for home improvements, you can deduct the interest from your taxable income and lower your tax expenses.

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