If your house is worth more than the remaining repayments on your dent, you can get a home equity loan. However, to become under this situation, you must be the lucky one and play smartly. Although acquiring a home equity loan could be a smart move to increase your home’s worth or pay other significant expenses, you must learn about its requirements before going for it.
If you have a substantial amount of equity in your home either because the market value of your home is high or you have paid all the mortgage on your home, and now you officially own the house, then you are capable of getting a significant amount of loan.
But can you qualify for a Home Equity Loan or HELOC? This is what needs to be kept in mind before going for a HELOC or home equity loan.
Following are some requirements to apply for Home Equity Loan or HELOC, which should always be remembered.
- Debt-to-income ratio
- Credit score
- Equity percentage
- Bills payment record
Debt-to-Income Ratio
Before approving your HELOC or home equity loan application, your creditors calculate your debt-in-income ratio, which should be at least 40%. This DTI ratio is calculated only to identify whether you can afford to borrow more than your present debts.
However, your DTI ratio is calculated by adding all your monthly mortgage payments and other expenses such as loans, child support, mortgage, leases, or allowance, dividing this number by your income, and converting this number as your DTI percentage. For instance, if you earn $50,000 per month, you must have at least 40% DTI, which is approximately 20,000.
What DTI Ratio do Lenders Need?
The federal regulations have set a limit of fixed-term home equity loans for a fixed rate which is 43%. However, for HELOCs, the creditors have the decision to set this rate which means that you can quickly obtain a mortgage if your DTI ratio is higher.
In HELOC, the home equity credit lines are set with a variety of DTI ratios, and these standard ranges need the users to use their own verdict. With HELOCs, lenders may decide the DTI percentage on their own. Usually, they decide on a higher DTI ratio than home equity loan percentages.
Credit Score
A precise credit score also varies from lender to lender, but the most usual credit score is in the mid-to-high 600s in order to qualify for HELOC or home equity loan. Your creditor may require a higher credit rate from 760 or more, making it easier to be eligible for the loan and access to the lower interest rates. Concisely, the more credit score you hold, the more chances are there to qualify with lower interest rates.
In case your credit score is in the low-600s or lesser, you may be at risk of not qualifying for a home equity mortgage or HELOC. Although if you have low DTI or LTV ratios, you are at less risk to disqualify, your credit score should be ideal. Make sure to buy and consider different lenders who charge the low-score category.
Equity percentage
When it comes to HELOC or home equity loans, some creditors require your equity percentage of at least 15% on your home. However, depending upon the lender, the equity percentage may vary. Usually, many lenders want you to have 15% of your equity on your home. However, some may require higher and ask for 20% at least.
You won’t be able to tap this percentage of equity with any concern, whether you have or not. Your creditor would set your mortgage limit on the basis of the Loan-to-Value ratio, which is the remaining mortgage on your home you owe against market value. Your LTV ratio is the opposite of your equity, which means the more equity you have, the lower the LTV ratio will be there.
| Typically, creditors want to see a collective LTV ratio of a maximum of 85%. If you want to calculate your LTV ratio and equity percentage, you need to get a precise estimation of your home at market value. |
Once you have calculated your home’s value, divide your loan balance by this amount and multiply it by 100, and you would get your LTV ratio. For instance, if your house is worth $50,000 and your loan balance is $25,000, your LTV ratio would be 50%.
Similarly, to get your equity percentage, subtract your loan balance from your house’s market price and again divide by your home’s value. For instance, your home costs $50,000 and the loan balance is $25,000; your home equity percentage would be 50%.
Bill Payment Records
Your creditor would also consider your bill payment history and your credit report to evaluate your payment schedules. They see these reports to determine that you pay your bills consistently without any delay, which indicates that you’re responsible for paying your installments and other expenses.
If your history represents late bill payments, it can be dangerous for your HELOC approval by the lender, no matter if you qualify in other factors. It is vital to keep your payment history clear and trustworthy because it impacts your loan application substantially.
Other Ways to Obtain Home Equity Loan or HELOC
If you believe that you won’t be able to qualify these steps for a home equity loan or HELOC or you’re afraid of a high-interest rate, you can adopt some other ways to obtain a mortgage. Such as:
Mortgage Refinance
The mortgage refinance replaces your current mortgage, so you need to pay only a one-month payment with probably lower interest rates during the procedure.
Cash-Out Refinance
Cash-out refinance is another option to discover, which is a little different yet needs stricter requirements. However, this option usually comes with lower interest rates as compared to home equity loans or HELOCs in the present market.
If you pick the cash-out to refinance, you must be sure to search numerous creditors to get an easy and straightforward deal.