Getting a home equity loan

A home equity loan provides a lump-sum payment borrowed against your home's equity, repaid over a fixed term with a fixed interest rate. It is often called a "second mortgage." Unlike a HELOC, the entire amount is disbursed at once and payments are predictable from day one.

27 steps across 7 sections

1. Structure

  • Lump sum: Entire loan amount disbursed at closing
  • Fixed interest rate: Rate locked at closing, does not change over the life of the loan
  • Fixed monthly payments: Principal and interest payment stays the same every month
  • Repayment term: Typically 5-30 years
  • Second lien: Subordinate to your primary mortgage

2. Borrowing Limits

  • Most lenders allow borrowing up to 80-85% of home's appraised value minus existing mortgage balance
  • Some lenders go up to 90% CLTV for borrowers with excellent credit
  • Minimum loan amounts typically $10,000-$25,000

3. Equity

  • Minimum equity: 15-20% after the loan
  • CLTV calculation: (Existing mortgage + home equity loan) / Appraised value must be 80-85% or less

4. Debt-to-Income Ratio

  • Maximum DTI: 43-50%
  • Includes all monthly obligations (mortgage, car, student loans, credit cards, the new home equity loan payment)

5. Income

  • Stable, verifiable employment or income
  • Self-employed: 2 years of tax returns typically required

6. Steps

  • Check your equity: Current home value minus mortgage balance
  • Review your credit: Pull free credit reports; address errors before applying
  • Gather documents: Pay stubs, W-2s, tax returns, bank statements, mortgage statement, homeowner's insurance
  • Shop lenders: Get quotes from at least 3-5 lenders (banks, credit unions, online lenders)
  • Submit application: Complete formal loan application with chosen lender
  • Home appraisal: Lender orders appraisal to verify home value
  • Underwriting: Lender verifies all financial information and property details
  • Receive Closing Disclosure: Review final terms at least 3 business days before closing
  • Close and fund: Sign documents; funds disbursed (often within a few days of closing)

7. Timeline

  • Total process: 2-6 weeks from application to funding
  • Appraisal: 1-2 weeks
  • Underwriting: 1-2 weeks
  • 3-day right of rescission: After closing, you have 3 business days to cancel

Sources

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