The requirements for a home equity loan can be different, but having a good credit score and reducing your debt to income ratio will increase the likelihood that you’ll get approved. As with other loans, the lender will assess your income, credit score, and debt to see if you are eligible for a loan. Since […]

The requirements for a home equity loan can be different, but having a good credit score and reducing your debt to income ratio will increase the likelihood that you’ll get approved.

As with other loans, the lender will assess your income, credit score, and debt to see if you are eligible for a loan. Since your home is the security for this loan type, your equity also has a part to play in your approval. You can use our guide to determine if a home equity loan is right for you.

Home equity loans are a type of loan.

Home equity loans, also known as second mortgages, are installment loans that allow you to draw on your home’s equity. The interest rates on home equity loans are usually fixed and the terms can be up to thirty years.

Home equity loans allow you to borrow a large amount of money at once. This can make them a great way to cover expenses when you have a set budget, such as consolidating your credit card debts or paying contractors for home projects.

The two are different in that home equity loans offer you a line of credit with a maximum amount. Interest is charged only on the money you borrow. If you are constantly in need of money, such as if you have to make repairs on your home regularly, HELOCs may be the best option.

What is the maximum amount you can borrow using a home equity line of credit?

Home equity loans allow you to borrow up 80% of your equity. You may even be able borrow 100% of the equity in your home. A higher loan amount is risky because you could end up underwater if the value of the house drops.

Are there any requirements to get a loan for home equity?

Lenders will evaluate your application to a home equity mortgage by evaluating your home value, credit score, and ability to make payments. Although the requirements for a home-equity loan can differ, these are some general guidelines.

Scores of at least 620

Credit scores above 620 are generally required to qualify for a home equity line of credit. Higher credit scores make it easier to get approved, while a good score could lower your rate.

Some lenders will offer loans with credit ratings of less than 619, however, these loans may cost you more in the long run. If you can’t afford the payments on your home equity loan, it could lead to losing your house.

At least 20% equity is required in your house

To qualify for an equity loan, you need to have a loan-to value ratio (CLTV) of at least 80 percent. You can borrow up to 80% from your equity if you own at least 20% of the house. The requirements for home equity loans vary greatly by lender. Waiting until your home has at least 20% equity could allow you to qualify for an equity loan in the future.

DTI ratio under 43%

The debt-to income ratio tells you how much of each month’s earnings goes towards debt repayments. DTI is a way to tell lenders you may have a lot of debt and that it could be difficult for you to pay back if you get a loan.

DTI requirements for home equity loans can vary from 43% to higher. Calculate your DTI using your total monthly debt payment and divide that amount by your monthly salary. Multiply that number by 100 for a percentage. Paying down your debts to reduce debt payments, or increasing your income each month could help lower your DTI if it is higher than 43%.

How can you make use of a home equity line of credit?

Home equity loans can be used for debt consolidation, to pay emergency bills, large purchases, medical treatment or renovations. You may be able to deduct mortgage interest if you pay for home improvements or renovations with a home equity credit.

Personal loans, on the other hand, may be subject to certain restrictions. Personal loans may not be available for tuition fees, but home equity loan restrictions are different.

The advantages and disadvantages associated with a home equity mortgage

Here are some pros and cons you should consider if you plan to apply for a loan against your home’s equity.

Benefits of Home Equity Loan

  • Low Interest —Because your home is collateral for a home equity, the loan has a lower risk than other unsecured loans. Home equity loans may have lower rates of interest than credit cards and other loans.
  • Loan terms that are long —Loan term can be up to 30 years. This allows you the flexibility of spreading out your repayments.
  • Flexibility – You can borrow money for a variety of different expenses.

The disadvantages of home equity loans

  • Reduces equity — Borrowing against home equity reduces the ownership stake you have in your home. If you decide to sell your home, you will need to repay the loan, which could reduce the value of the property.
  • Risk of foreclosure —Tapping into a second mortgage on your house adds hefty debt payments to your budget. If you are unable to pay, the lender may foreclose your home.
  • Charges —Although some lenders do not charge any fees for processing your loan, other may charge closing costs that range from 2 to 6 percent.
  • A long application process — Getting a loan for home equity may require you to get an appraisal in order to find out how much the house is worth. The application process for a home equity can be a long one. Unlike an unsecured loan, which could fund within days, the closing and funding of a loan may take up to a month. From application to closing, Discover Home Equity Loans can take up to 55 days.

FAQs on home equity loans

What is the credit score required for an equity home loan?

Credit scores can be as low as 620 for home equity loans, though minimums may vary. Your credit score can affect how much money you are able to borrow, as well as your interest rate.

What is the process for obtaining a home equity loan?

A home equity loan is more complicated than a personal one, as the lender must determine the home’s value and the closing of the loan could take weeks. To borrow, you must also have equity in your house. You may not be eligible if you have recently bought a house and it has less than 20% equity.

What is the maximum amount of money I can borrow through a home equity line?

You can usually borrow 80% or more of your equity. However, some lenders allow you to borrow 100%.

The Next Steps

You should first calculate your equity, and then check your credit rating to determine where you are. Shop around to compare rates, fees, and timelines for funding with various lenders. Unsecured personal loans are a good option if you want to borrow cash for personal purposes but need more money than what a home equity can provide.