If you’re a homeowner, then you’re likely familiar with the concept of equity. Home equity loan is essentially the portion of your home that you’ve already paid off. It represents your stake in the property vis a vis the lender’s.
In terms of concrete value, the home equity loan is the estimated market price of your home minus the balance remaining to be paid on your mortgage. Depending on how long you’ve been paying down your mortgage, it is very likely that home equity could be your most valuable asset. For this reason, many people look to leverage their home equity loans in order to access other funds.
Here is a brief overview with seven of the basic home equity loan requirements:
Requirement #1: At least 15 percent equity
When looking at the factors that will determine your eligibility for a loan, the first home equity loan requirement that will be considered is your loan-to-value ratio. As mentioned above, equity is the difference between how much you owe and how much your home is worth.
Using these numbers, lenders divide your current loan balance by the current appraised value to arrive at your LTV.
Requirement #2: A certified appraisal
In order to determine your home’s current market value, you will need to have it appraised. As one of the basic home equity loan requirements, it’s likely that your lender will request a certified appraiser to inspect your home.
If you’re looking to secure a home equity line of credit, or a HELOC, you’ll need to figure out your combined loan-to-value ratio, or CLTV. This is determined by adding how much money you want to borrow, either as a lump sum or a line of credit, and how much you owe.
Requirement #3: A solid credit score
In addition to establishing the fact that you have the required amount of equity, most banks will also want to check your credit score. If you don’t have good credit to back you up, you’ll likely find it a lot more challenging to get a loan, as favorable credit score also is essential in order to meet most banks’ requirements for a home equity loan.
As a rule of thumb, a credit score above 700 most likely will qualify you for a loan, as long as you meet the equity requirements. You might be approved with a lower score, even hovering around the 620 range, but be warned that this will likely come accompanied by higher interest rates. For anything below 620, a loan is not impossible, but it is very likely that the lender would require the borrower have more equity in their home and carry less debt relative to their income.
After you’ve received your credit report, it is important to review it carefully to ensure that no errors were made. It is, unfortunately, something that happens and that could end up ruining your chances of securing a loan if you’re not careful. In the event that you find a mistake, report the problem to the credit bureau that’s showing the information. Your score should improve once the error is removed.
Requirement #4: A debt-to-income ratio between 43 to 50 percent
Another important home equity loan requirement is your debt-to-income ratio, or your DTI. In this case, the lower the percentage is—the better. You’ll discover that the qualifying DTI ratio varies from lender to lender, but some require that your monthly debts eat up less than 35 percent of your gross monthly income. Other lenders, meanwhile, are willing to go as high as around 40 percent for your DTI.
Requirement #5: Ability to provide proof of income
In addition to aforementioned home equity loan requirements, lenders will want to see some other evidence that reassures them you’ll be able to repay your loan. One of the major considerations is income, which will undoubtedly influence how much they feel comfortable lending. In many cases, a higher income can also help to cancel out the appearance of debt by giving you a better debt-to-income ratio.
Requirement #6: Favourable credit history
On top of looking at your credit score, the bank will likely take your broader credit history into consideration. For example, if you carry a large amount of debt, it is possible that application will be denied even if your credit score is above 750.
Don’t be completely discouraged though, if you’re in the process of rebuilding your credit score and your credit history reveals a steady incline from the 500s into the mid-600s or higher. This demonstrates that you’re on the right track and gives you a better chance of approval.
Requirement #7: Reliable payment history
A good payment history will also help improve your approval odds, in addition to the terms of your loan. A pattern of timely payments will show the lender that you’re a reliable borrower and give them peace of mind entering into a new agreement with you.