Here's what to expect during the home equity loan underwriting process

CBS News

13-02-2025

If you need to borrow cash, taking out a home equity loan is one of the most affordable ways to do it. Rates on these loans and home equity lines of credit (HELOCs) tend to be much lower than other financing products, such as credit cards and personal loans, and they can save you significantly in the long run.
Just be prepared: The borrowing process is a bit different from other lending products, mostly due to the prime role your home plays, so it's important to understand how that works before tapping into your home's equity.
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Here's what to expect during the home equity loan underwriting process
Are you planning to tap your home equity for cash in the near future? Here's what to expect from the borrowing process.
Your home will play a big role
The biggest difference with home equity loans when compared to other types of borrowing products is that your house will play a critical role in the process. This is because it will serve as the collateral for the loan — and is what the lender can seize if you fail to make your payments.
Your home (and its market value) will also influence what you can borrow with your loan. To determine this, most lenders will order an appraisal. The appraiser will assign the home a value based on its age, condition, features, and local home sales data, and that number — minus what you owe on your main mortgage loan — will tell lenders how much equity you have and, therefore, how much you have to borrow from.
"One of the biggest struggles in the industry is that people come in having an idea of how much money they want but they have no idea how much equity they have in their home," says Dre Torres, a loan officer at Cornerstone First Mortgage. "It can make things difficult when they come in wanting more cash than they have available."
Typically, an appraisal is an in-person evaluation of the home, but that's not always the case. Some lenders may take a more digital, data-based approach instead. These are sometimes referred to as "automated valuation models" or AVMs.
"We use automated valuation models to estimate your home's value, and if the AVM's confidence score is strong, a full appraisal may not be necessary," says Scott Bridges, chief consumer direct lending production officer at Pennymac. "This saves you both time and money."
In some cases, you may not need an appraisal at all. For example, if you only closed on your loan a year ago and you still have a very recent appraisal, you may be able to use that instead.
Still, "90% to 95% of the time for home equity loans, you will need an appraisal," Torres says.
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Your finances will be scrutinized
You can also expect your finances to be scrutinized pretty carefully, largely because home equity loans are riskier than traditional mortgages. They are an extra monthly payment in addition to your normal mortgage and bills, and as such, lenders want to ensure you can handle the additional financial pressure that puts on your household.
One thing they'll look at is your credit score. And while the exact minimums you'll need to meet depend on the lender you choose, you can usually expect to need a 650 score or higher, Torres says.
"Higher scores — 700 plus — will get more favorable financing options," Torres says.
Lenders will also look at other financial factors, llke your other debts, your income and your credit history. Your debt-to-income ratio (DTI), or how much of your income your debt payments take up, will also play a role.
You can calculate your DTI by totaling up your total minimum payments across all your debts — including the new home equity payment — and then dividing by your monthly income. Most lenders want a DTI of 43% or lower, though some may allow for higher DTIs under certain circumstances.
Keep in mind, though: "A lower DTI will open the borrower up to more programs and better rates within those programs," says Kevin Leibowitz, a mortgage broker with Grayton Mortgage in Brooklyn.
You'll want to come prepared
Before you apply for a home equity loan, Bridges says, "It's important to assess your financial health."
"First, determine how much you need to borrow and what monthly payment you'd be comfortable with," Bridges says. "Second, know your credit score and take steps to improve it if necessary. The better your credit score the more loan options are available to you."
You can improve your credit score by reducing your debts, paying your bills on time and disputing any errors on your credit report. Not opening any new lines of credit in the months leading up to your application can also help.
Beyond this prep, you can also gather up the documentation you'll need for the loan. As with your first mortgage, you'll need things like your pay stubs, bank statements, and W-2 forms. And "if the borrower's profile is more complex, then tax returns might be required," Leibowitz says.
If you're on Social Security, you'll also need your award letter, or if you're receiving funds from a pension or IRA, you'll need recent statements from those accounts as well.
The bottom line
If you're considering a home equity loan, reach out to a lender to get more information on what qualifications you'll need to meet and what it may mean for your finances. They can also help you understand what terms and interest rate you might qualify for and how that fits into your budget.
You should also compare several lenders before deciding what company to go with. Different lenders offer different programs, rates, fees, and terms, so shopping around can ensure you get the best loan for your needs.