Owning a home can be a great way to build wealth, especially once you’ve built up a significant amount of equity. A popular way to access equity in your home is with a home equity loan, which is a type of second mortgage. It’s helpful to understand how long it takes to apply for home equity loans and receive funds so you can decide if they are a good fit for your situation.
With home equity loans, you borrow against the equity in your home or the equity in the property you actually own.
To calculate how much equity you have, take the value of your home and subtract the current balance of your mortgage. That is your shareholding. Typically, you can borrow between 80% and 85% of the equity in your home.
Home equity loans offer lump sum payments, so after closing, you will receive your loan amount in one lump sum. You can then use that money however you want: on home repairs, college tuition, or even to pay off credit cards and other debt. Although you should carefully consider the pros and cons of using the money for each purpose, there are no rules for how you can use these funds.
Most home equity loans have fixed interest rates and terms lasting between five and 30 years. You will repay the loan in fixed monthly payments over the life of the loan, just as you would with a traditional fixed-rate mortgage. Home equity loans use your home as collateral, so if you don’t make your monthly payments, the lender can foreclose on your property.
To get a home equity loan, you’ll need to apply, submit paperwork, wait for the home appraisal, and finally close on the loan. After that, you will receive your funds in one lump sum.
Below is how long each step usually takes:
-
Application: This is when you complete the lender’s home equity loan application and submit the necessary documentation. You should be able to complete this step in one day.
-
Assessment: Your lender uses the home appraisal to determine the value of your home and how much equity you have to borrow. You will be able to receive the appraisal report between six and 20 days after the appraiser evaluates the house.
-
Subscription: In the underwriting process, the lender analyzes your credit, financial information, and the details of your loan application to make sure you qualify for a home equity loan. This may take up to a month.
-
Closing: After underwriting and approval, you must close on your second mortgage. Your closing appointment is when you will sign the loan documents, pay the closing costs, and finalize your loan. This must be done in one day.
-
Funds: You should receive your home equity loan funds once the right of rescission period ends. Legally, this is at least three business days.
According to the Mortgage Bankers Association, the industry-wide average number of days from home equity loan application to approval is 39 days. The exact amount of time this takes from start to finish depends on your home equity loan lender. For example, Better Mortgage claims it can close HEL in just three days.
How quickly you submit the required documentation, how quickly your lender requests an appraisal, and other factors influence this timeline.
While your choice of lender plays a big role in the speed of your home equity loan, there are other ways to control how long the home equity loan process takes. If you’re hoping to accelerate your home equity loan, try the following:
-
Prepare your documentation before applying. You’ll want to have pay stubs, bank statements, tax returns, W-2 forms, and property tax bills on hand so you can submit them with your application. Any delay in submitting required documentation will only extend the home equity loan process.
-
Keep your job and income stable. Changes in your employment or income during the application and underwriting process may affect your loan approval. Try to keep your work and schedules stable, and in line with the information you submitted in your application, until closing.
-
Maintain a stable financial profile. Similarly, any drastic changes to your bank account balances, debts, or credit scores can slow down the loan process. Avoid making large credit card transactions while you are in the middle of a loan application. You should also make sure you pay your bills on time so your credit score stays high and avoid applying for new loans or credit cards until you have closed on the home equity loan.
You should also be selective about the lender you work with. Consider a few different options and ask them about their current workload and closing timelines.
The requirements for approval for a home equity loan will depend on your lender, but generally you need a credit score of at least 680, a debt-to-income ratio of 43% or less, proof of homeowner’s insurance, and sufficient equity in your home.
The biggest disadvantage of a home equity loan is that it uses your home as collateral. That means if you don’t make your monthly payments, the lender can foreclose on your home.
The answer depends on the loan term you choose and the interest rate you qualify for. If you took out a 10-year home equity loan worth $50,000 at an 8% rate, your payment would be just over $600 per month.
Laura Grace Tarpley Edited this article.