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If your house is paid off and you need access to funding, you might be wondering if a home equity loan is an option for you.
First, a home equity loan is a type of loan in which the borrower’s home serves as collateral for the borrowed funds. It is a secured loan that allows borrowers to access some of the funds from the equity built up in their home.
A mortgage and a home equity loan are two separate loans, so a homeowner does not need to have a mortgage in order to get a home equity loan. In most cases, having a paid-off house can actually help your chances of getting approved for a home equity loan.
The amount you can borrow will depend on a variety of factors including your loan-to-value ratio, credit history, and debt-to-income ratio.
What is Loan-to-Value (LTV)?
Loan-to-value is a ratio that lenders use when they consider underwriting a new loan. The ratio is calculated as the current outstanding loan balance divided by the market value of the property. The difference between the loan amount and the value of the property is the equity stake that the owner has in the property.
When you first purchase a property and take out a new mortgage, you might have around an 80 percent loan-to-value ratio with a 20 percent down payment. Lenders consider lower loan-to-value ratios to be less risky. When you have paid off your home, your loan to value ratio is actually 0 percent because you have 100 percent equity ownership in the home and no outstanding loan balance. This is the least risky situation from the perspective of the lender.
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How to Apply for a Home Equity Loan After Your Home is Paid Off
You can apply for a home equity loan by visiting a local lender’s branch office or filling out an online application. You’ll need to provide the same types of documentation that you do when you apply for a mortgage.
Along with the information on your application and your credit report, the lender will want to see your pay stubs, W-2 forms, documentation of other sources of income, and the most recent monthly statements on all outstanding debts. The lender will also want to obtain an appraisal report in order to determine the current market value of the property, as well as at least 2 years of tax returns.
The lender will evaluate your credit history and total outstanding debt payments as part of the underwriting process to see if you meet the requirements. This is where it will help you to have paid off your home.
You established good borrowing behavior by paying off the debt, you no longer have that debt adding to your overall debt calculation, and you will be able to access the maximum amount of money that could be available based on the current market value of your property.
Here’s How it Works
This example shows how a lender evaluating an application for a home equity loan uses a loan-to-value calculation called a combined loan-to-value (CLTV) ratio. This ratio adds the combined amount of outstanding debt from the mortgage and home equity loan and then divides that amount by the total property value:
CLTV = (outstanding balance on mortgage + outstanding balance on home equity loan) / home value
Or
CLTV x home value = total outstanding balance on mortgage and home equity loan
Lenders generally don’t want the CLTV to exceed 85%. So, if you have a home value of $250,000 and have paid off your home, you could potentially borrow up to $212,500 with a home equity loan.
0.85 x $250,000 = $212,500
On the other hand, consider a situation where you have not paid off your home. Assume you have an outstanding mortgage balance of $150,000 on that $250,000 home. The calculation above showing the maximum dollar amount of your combined loans has not changed. You can still have a combined outstanding balance of $212,500. Now, however, that has to include your mortgage balance of $150,000. What’s left over is the maximum dollar amount you can borrow in a home equity loan: $62,500.
$212,500 – $150,000 = $62,500
So, you can see why having your home paid off is actually beneficial to your home equity loan application. However, it is important to mention that even though there is an allowable amount to borrow, you should not borrow more than is needed for the purpose of the loan.
Home Mortgage, Refinance, and Home Equity Loans
- Fixed terms
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- Cash out up to 90% loan-to-value
Our home is paid off but in debt with credit cards. Is it better to do a new small mortgage or a home equity loan?
Hey Pam,
Below is some more information on a few options you may explore:
https://lendedu.com/blog/cash-out-refinance/
https://lendedu.com/blog/home-equity-loans
My father’s house is paid off. He’s retired, has no dept and and receives roughly $3,500 a month in combined pensions and social security. He needs to access some cash for paid home care, however is hesitant to take out a reverse mortgage. Would he be eligible for a HELOC? Thanks so much.
Hey Josh,
Thanks for reading! Each lender has unique requirements in order to qualify for a HELOC. Below is more information on some of the best HELOC lenders:
https://lendedu.com/blog/home-equity-line-of-credit/
I own a home in Clearwater, fl. It is on the market for $220 to $240 thousand. The sale is taking longer than hoped but we have an offer for $216. I’m then purchasing a home for $174. Can I get a small $ 50000 loan until close, which should be closed in mid August at which time I can fully pay off this loan. But since I’ve been expecting the sale to go through sooner i still officially own that home. But was counting on the funds sooner to catch up on bills and take kids on a vacation. Can you help with this loan on home equity or should i go to a bank?
Can you help and how soon can I get the funds?
Please can you help me? Or direct me to an Institute than might help
Hey Kate,
Below is an article with some of the best home equity loan options available. There are a few options with fairly quick funding:
Figure – Funding in as few as 5 days
Spring EQ – Close in as few as 11 days
https://lendedu.com/blog/home-equity-loans
If my husband and I own our house can we take out a loan to buy a restaurant, using our house as collateral?
Hey Katrina,
That is a great question and thank you for reading! Below is an article that breaks down if you can use a home equity loan to start a business:
https://lendedu.com/blog/home-equity-loan-to-start-a-business/
Hi i bought my home in Oct of 2018 we are trying to get a loan we own our home we paid cash for it my question is will the bank have to come and estimate the value of our home again since we just recently purchased it 9 months ago? And our credit is bad but my dad has great credit and is willing to co-sign for us his name isnt on our deed can he still co sign thank you???
Hello,
Thanks for the post Shellie! Your dad may cosign onto the loan but he will equally share the mortgage debt with you, yet will not get any ownership stake in the home.
Hi I would like to make equity loan against my property
Hey Zanele,
Below is an article with some more information on home equity loan options:
https://lendedu.com/blog/home-equity-loans
I am retired and own a condo which is paid off. It was recently flooded but has been rebuilt from new floors to kitchen appliances and cabinets. I have recently consolidated my bills and am living on retirement and Social security income. My credit score is not great. I recently heard about a house loan that has no payments and win’t affect me while I am living.living. What is your advice on this loan. I am 71 yrs old now and I have no extra money to enjoy my last years.
Hey Jennifer,
I’m sorry this has happened to you. Below is an article with more information on some possible home improvement loans that may help you out:
https://lendedu.com/blog/best-home-improvement-loans
Need home improvement on my home I have no mortgage
Hey Roosevelt,
Below is a blog post with more information on some of the best home improvement loans available:
https://lendedu.com/blog/best-home-improvement-loans
What is the average interest rate on a home equity line of credit?
Hey Jessica,
Here is the Citibank customer service number: 1 (800) 374-9700
I bought my home with cash after I retired earlier this year. I am wanting to start a business with my sister, do some work on my house and pay off other debts by taking out a loan against my house. My credit score is 539 and I’m unemployed until I get my business started. I lived my last 9 years with my ex- fiancé so my credit went to pot but his is great. Is there any hope of acquiring a loan against my house?
Hey Teresa,
Thanks for the post! Below is ana rticle that may help you out:
https://lendedu.com/blog/home-equity-loans-for-bad-credit/
I’m a new homeowner for over 3yrs. I’m also disabled due to a stroke from a brain aneurysm that hemorraged I have never established credit but I paid cash for my home and can’t afford the taxes on my fixed income. My fiance passed away in April now I’m alone with no help and will lose my home this year if I don’t pay the last 3yrs in property taxes. Someone already has bought the home by paying the tax debt from 1st year. What do I do? Am I eligible?
Hey heather,
Thank you for the post! Below is an article on how home equity loans work and the best lenders that may be able to help you out:
https://lendedu.com/blog/home-equity-loans