Download Acrobat Reader 5.0 or higher to view .pdf files.
✕
First Western Bank logo
First Western Mobile Banking
First Western Bank
FREE - In Google Playthe App Store
VIEW VIEW
FDIC-Insured - Backed by the full faith and credit of the U.S. Government

Requirements for Home Equity Loans

Requirements for Home Equity Loans

Are you considering taking out a home equity loan to fund home renovations, pay for an expense you weren’t planning for, or consolidate some debt? A home equity loan can be a great financial option, but there are some things to know about what lenders look for to determine your eligibility. 


Knowing what you need to qualify helps you stay prepared and minimizes surprises. In this article, we will explain what lenders, such as First Western, are looking for when trying to qualify homeowners for a home equity loan. 

Debt to Income Ratio

One of the primary requirements for home equity loans that lenders look at is your debt-to-income ratio. 


Debt-to-income ratio or DTI, is the percentage of monthly income that goes to repaying current debt. Your debt responsibilities may include; 

  • Your mortgage or rent

  • Your car loans

  • Your credit card payments

  •  Your student debt

  • Any other consistent recurring debt 


The DTI helps lenders see how capable the customer is of making payments and managing their finances. It also helps lenders see how much income they can spare (if they can) on a new home equity loan. 


To be approved for loans and certain other features, First Western will look for a DTI of 41% or below. (Not all lenders have the same DTI requirement, though.) A low DTI indicates that you have sufficient income to take on new payments, while a high DTI indicates that you may be taking on more financial risk.

Credit History

Your credit history and credit score significantly impacts your ability to qualify for a home equity loan. Your credit history is reflected in the credit score on your credit report. Lenders review your credit report to see how you have handled credit in the past and your likelihood of repaying this loan. Certain loans may have minimum credit score requirements for home equity loans.


Different types of loans may require different credit score numbers, but typically

  • Better interest rates may be offered to those with higher credit scores.

  • Those with lower credit scores may still be approved for loans, but higher interest rates may be charged.

  • Those with stronger credit profiles will typically pay less in interest over the life of the loan. If your credit score is low, it is recommended to work on improving it before applying. 

Home Equity Value

Equity in your home serves as collateral for the loan itself, and lenders will evaluate how much equity you have. This is the difference between your home’s current market value and the amount still owed on the mortgage. First Western will loan up to 85% of the home’s appraised value. 

How Home Equity Loans Work

A home equity loan allows you to borrow money while using your home equity as collateral. We offer both fixed rate and floating rate options. Note that it is vital to make your payments on time since the loan is secured by your home to avoid any issues in the future. 

Should I get a home equity loan or HELOC?

A Home Equity loan is very similar to but not quite the same as a Home Equity Line of Credit (HELOC). The difference is in the structure of the loan itself. 


A Home Equity Loan allows you to:

  • Borrow a lump sum of money.

  • Have fixed  or variable interest rates.

  • Have fixed monthly payments. 

  • Have a set term length.

 

A HELOC is similar to a credit card with the major difference being that it has a term limit. A HELOC offers;

  • A credit line to borrow from as needed.

  • Interest rates are usually variable.

  • A repayment period and a draw period.


If you want predictable payments and you know the amount you definitely need, the better option would be the home equity loan. However, if you want flexible access to funds, a HELOC might be the better option. 


Home Equity Loan Alternatives

Cash-out Refinance

In a cash-out refinance, your current mortgage is replaced with a new one that is at a higher amount, and the difference is given to you. Cash-out refinancing is similar to a home equity loan, in that you are given the money all at once to pay off later. One benefit is that you’re able to consolidate everything into one mortgage payment. However, this may cause a change in your interest rate or loan term. 

Reverse Mortgage

A reverse mortgage is generally for homeowners 62 and older. In reverse mortgages, you do not make payments to the lender each month. The loan balance actually increases each month. It is typically paid back when the home is sold, when the owner moves out on a permanent basis, or when the owner dies. 

Personal Loan

A personal loan is similar to a home equity loan, differing in that your home equity is not used as collateral. The same requirements for home equity loans apply (credit score, DTI, income, etc), and approval may be a faster process than for a home equity loan. However, do note that personal loans typically have a greater interest rate than home equity loans. 

Home Equity Loan Requirement FAQ

How long does payout take for a home equity loan? 

Typically, the process takes two to six weeks. This window accounts for several steps in the process, including the lender's review of your application, a home appraisal to confirm your property's current value, underwriting, and final approval. 


Once everything is approved and you've signed the closing documents, most lenders are required to wait three business days (a mandatory rescission period) before releasing funds. The exact timeline can vary depending on your lender, the complexity of your financial situation, and how quickly you're able to provide any required documentation.

Can I get a home equity loan without a job? 

Yes, it is possible to obtain a home equity loan without traditional employment! However, lenders will still require you to demonstrate financial stability before approving your application. 


While a conventional 9-to-5 job isn't one of the requirements for home equity loans, you will need to present an acceptable credit score as well as proof of a reliable source of income. This can come in many forms, such as retirement or pension benefits, Social Security payments, investment income, rental income, freelance or self-employment earnings, or other consistent revenue streams.


How much equity can I borrow from my home? 

First Western will loan up to 85% of the home’s appraised value. This 85% leverage point includes any outstanding mortgage balances already in place. 

 

How long is a home equity loan term? 

Home equity loan terms can range from 5 years to 30 years depending on the type of loan you choose. Talk to your lender to see what options are available for your situation.


**All loans are subject to credit approval. Terms, conditions, and eligibility requirements vary by lending institution. This information is for general informational purposes only and does not constitute financial advice or a guarantee of loan approval or funding timelines.