If you take a look at your home, the first thing that comes to mind is that it’s a place to live in. Upon closer inspection, you might acknowledge that it is an extremely valuable asset to own. Whether or not if you own this home, or another property, is beside the point. You might be able to unlock some hidden benefits through various channels.
Borrowing a second mortgage is just one of those channels that can assist you in this endeavour. Although there are different types of second mortgages, the most common one is the home equity loan. Like any mortgage, there are certain things needed in order to secure one.
Here are the six things to know about what is needed for a home equity loan.:
1. Financial Organization
Before going ahead with any large loan, it is important to first get your finances in order. Lenders will only approve you for a second mortgage, if the risk you carry is relatively low. If you plan on going ahead with a home equity loan, ensure certain areas are taken care of. For starters, your credit should been in good shape.
You’ll want to also have a consistent source of income, so that you can meet the minimum payments. Make sure you are in a job that can provide you with a steady flow of funds. The more you present yourself as risk-free to a lender, the better off you will be!
2. Equity Requirement
You need to meet the equity requirements for a home equity loan. As the name of the loan implies, acquiring a home equity loan means that you will need equity. Your home or property should be in a position where it has built up enough equity. To secure the home equity loan, experts advise that you need at least twenty per cent. The more equity that is within the property, the better.
Moreover, there is a reason why the twenty per cent minimum is required for the loan. It allows you to truly access the advantages of the home equity loan, such as lower interest rates. Each lender will vary, in terms of what amount of equity is actually required. To be on the safe side, however, aim for at least twenty per cent.
3. Payment History
When the topic of risk inevitably comes up by a lender, certain profile characteristics will come up. Although having a low amount of debt is helpful when applying, your payment history is too. Your credit rating will give a basic overview of this to your lender, but there are other details to consider.
Having late payments on bills, for instance, will only discourage a lender from granting you the loan. To better your situation, try taking a look at automatic payments on your most crucial bills. That way, you won’t forget to pay your bills on time. You want to come across as risk-free as possible after all!
4. Miscellaneous Paperwork
Lenders will also instruct you to bring certain pieces of documentation, when applying for the loan. This paperwork will vary from individual to individual, but there are some common ones for all. For example, tax returns from previous years will generally be required. Paystubs from your job are also a good idea to bring along.
One of the most important parts of applying for a home equity loan is time. Sometimes, the process can drag on for weeks, especially if you are not prepared. To simplify the procedure on your end, ensure all key pieces of documentation are readily accessible. That way, you can get your loan approved quicker!
You might also have debt, from a credit card or another loan. Lenders will take a close look at your financial history, to see if there are any mitigating factors present. Outstanding debt from a student loan, for instance, might play a huge role in your ability to secure a home equity loan.
The amount of debt you have is measured against your income. Known as the debt-to-income ratio, this informs the lender if you are safe enough to be granted the loan. Try your best to reduce all forms of debt to a consistently manageable level. That way, it will make things much easier for you and the lender, before approval.
6. Shop Around
Of course, you don’t necessarily have to go with your original lender for the home equity loan. It is generally recommended to get multiple quotes, from different lenders. Compare and contrast their rates and fees accordingly, before you decide to go with a specific one.
Home equity loans, like any other second mortgage, require you to be as presentable as financially possible. The best way to make the process as smooth as possible? Ensure you are organized in all aspects of your financial profile. That way, you can eventually use your home as an extremely beneficial asset!