If you’re looking to use the equity in your home through a home equity loan or HELOC, you probably want to get the money fast. Whether you’re doing a home remodel, paying for a college education, or using the money for something else, you don’t want to wait around.
In some cases, getting a home equity loan can happen quickly. For example, we spoke to Adam Carroll, a homeowner who is also the Founder of National Financial Educators; he liked the idea of a HELOC because it would make it convenient for him to access funds to do projects around his house. “It was super easy,” he said. “It was a simple application process and they did a drive-by appraisal to determine the value of our home.”
However, it’s not true that everyone can get a home equity loan or HELOC as quickly as Adam did. The approval process can take anywhere from 2-6 weeks or even longer, depending on your situation. See below for factors that affect your timeline.
Bear in mind that every lender's process is slightly different; this is merely a general overview that applicants can expect.
Determine EligibilityThe first step in the HELOC process is for you, on your own, to determine your HELOC eligibility.
- Sufficient Equity: First and foremost, a HELOC requires you to have a certain Loan-to-Value (LTV) ration, which is the percentage of the home's value against which you can borrow. A common LTV is 80%, which means that your total mortgage debt plus the HELOC amount should not exceed 80% of the appraised value of your home.
- Credit Score: Your credit score is integral not only to determine your eligibility for a HELOC, but also the interest rate you would receive. For the most part, a higher credit score will increase your chances of qualifying for a HELOC and also secure you better terms.
- Income and Debt-to-Income Ratio: Do you have enough income to cover your monthly debt obligations? The comparison of your income to these payments is called your debt-to-income (DTI) ratio; a lower DTI ratio will increase your eligibility for a HELOC.
- Payment History: As part of determining your creditworthiness, lenders will evaluate your payment history to search for any past delinquencies or bankruptcies.
- Stability/Employment History: Having maintained a steady employment history could positively impact your eligibility for a HELOC.
Research LendersAs you would with any big decision or purchase, you should research your options.
- Interest Rates: Different lenders may have different interest rates, and this can significantly impact the cost of your HELOC! You should also consider fixed vs variable rates; a slightly lower rate might not be the best option if there is a possibility that it can skyrocket in the future. See if there are any conversion options, too.
- Fees and Costs: Don't forget the origination fees, annual fees, and closing costs when you compare overall pricing from lenders.
- Credit Requirements: Take stock of how competitive your credit score can be with various lenders.
- Repayment Terms:: Some HELOCs have a draw period followed by a repayment period, and some may have an interest-only period as well.
- Flexibility:: How easy will it be to access the funds? Some lenders may offer checkbooks or credit cards to use the funds, but others might have less convenient methods.
- Customer Service Reputation: Reviews will give you a window into the lender's character.
- Loan Limits: Some lenders' maximum and minimum borrowing limits might not suit your HELOC needs.
- Prepayment Penalties: If your financial plan includes paying off the HELOC early, you will want to make sure that there aren't penalties for it.
- Special Offers: It's possible that some lenders with similar terms may offer promotions or incentives for new HELOC applicants. See if you can take advatange of that kind of deal!
Apply for a HELOC
Step One: Gather Your Documentation
“The biggest factor in length of time it takes to get approved for a HELOC is how quickly you respond to the underwriter’s requests for additional documentation,” says Lee Huffman, an expert we spoke to who is VP of Finance at City National Bank. “After the housing collapse, banks are extremely cautious and want a lot of paperwork to support income, assets, and debts. This means that you need to be proactive and responsive in gathering relevant information.”
As for the type of documentation you need to provide, it varies depending on your situation. However, most financial institutions will ask for the following:
Proof of Income
Documents such as paystubs, W-2s, tax returns, bank statements, investment & retirement account statements can help to prove to the lenders that you are able to pay back the loan. If you have additional income sources, such as Social Security or rental income, those need to be included as well.
If you are self employed, you may need more proof of income. This includes business and personal tax returns from the previous two years. You may want to include profit and loss balance sheets and any additional documentation.
Proof of Debt Payments
Lenders not only look at your credit history, but how much you owe to others. Lenders will add up the total monthly payment for your property alongside any other outstanding debt. This can include credit card bills, student loans, child support and even installment loans.
The total debt is then divided by your gross monthly income, including your salary, investments and other forms of applicable income. That means the more complicated your situation (i.e. you have lots of documentation to provide to your lender), the longer it may take them to determine a suitable amount of money to loan you.
Property Ownership Documents
Your lender may need these types of documents to determine how much equity you have on your home. This includes property tax assessments, your mortgage statements, and even a copy of the recorded deed on the property.
Once you have selected your lender and have your documents assembled, you will be prepared to complete the application.
If your credit score is high, you may be approved much more quickly than someone who has a fair to low credit score. In those cases, additional documentation may be needed to determine if you’re eligible for a loan or how much you can borrow.
Set Up a Property Appraisal
Before you can access funds from your HELOC loan, the lender needs to determine the value of your property to determine how much you can borrow.
The appraisal is used to calculate the Loan-to-Value (LTV) ratio, which is the percentage of the home's appraised value that the lender is willing to lend. Different lenders have different LTV limits, and they utilize the ratio to assess the risk associated with the loan.
In some jurisdictions, appraisals are also required by law or other regulatory bodies to ensure that lending practices are fair. Such measures help prevent inflated property valuations and also ensures that borrowers aren't over-borrowing beyond their means.
The good news is that with many home equity loans, a full appraisal is not required. Many companies will look through public records to see the value of your property, or simply drive by your home like in Adam Carroll’s case. Assuming the records are accurate, this part of the process can be fairly quick.
Go Through the Underwriting Process
After the initial application process, an underwriter will review your profile and see how it compares to their loan requirements.
It is usually the verification process that causes most delays to your home equity loan approval. That's why you should aim to have all of your documents together from the beginning of the application process!
Generally, the underwriting process for a HELOC can take anywhere from a few days to a few weeks, depending on the complexity of the application and the volume of applications being handled. If the underwriter asks for additional documents, the timeline will also be extended based on how quickly you are able to provide them.
Review Your HELOC Offer and Wrap Up the Closing Process
Once your application is approved, the lender will prepare the necessary closing documents. This can take a few days. Officially closing the loan could differ depending on where you live. For example, the state of Texas requires that lenders cannot close a loan until at least twelve days after the borrower applies for a HELOC and receives a formal notice of their legal rights.
Even if your loan is closed quickly, the law states that you have three days to cancel your loan without any penalty. That means that the lender typically will not disburse the funds until the fourth business day after your loan has closed.
The actual closing meeting, where you sign the final paperwork, can take place in person or be conducted electronically, depending on the lender's procedures. This meeting can typically be scheduled within a few days once the documents are ready.
After the closing meeting, it may take a few additional days for the lender to fund the HELOC and make the credit line available to you. If you add all those "few days" together, you may end up with more than a week's worth of business days that it takes to finish the closing process and obtain your funds.
So, How Long Does It Take to Get a HELOC?
Were you doing the math? On average, the HELOC process can take anywhere from 30 to 45 days. However, it's important to note that this is a general estimate, and the actual timeline can be shorter or longer based on individual circumstances.
If you need access to cash faster than a typical home equity loan, you may want to consider alternatives. For example, an equity sharing agreement from Unison can help you unlock the equity in your home without a loan. Since this is not a loan, the application and verification process can go much more quickly.
With Unison, there are no monthly payments and no interest charges. Instead, the company invests alongside you in your home, sharing a portion of any future change in value when you sell the home – up to 30 years later.