As home equity increases, many homeowners are tapping into this growing source of available funds. This is particularly useful for homeowners that have a very low interest rate, since adding a home equity loan will not modify their existing mortgage rates or payments. This article explores the scope of the market and what it takes to qualify for a Home Equity Loan.
To qualify for a home equity loan, you must meet certain requirements that are often more strict than those for a typical first mortgage. The exact rules will vary by lender, but here are some general guidelines that most lenders follow.
Debt-to-income ratio (DTI): Your debt-to-income ratio measures the monthly debt payments you currently make compared to your monthly income. (Monthly Debt/Monthly Income)
To qualify for a home equity loan, your DTI ratio will typically need to be below 43% once your potential new loan payment is factored in. Certain lenders may allow a slightly higher ratio, up-to 49%. You can lower your DTI ratio by paying off debt or increasing your income.
Credit score: FICO scores are used by lenders to rate your creditworthiness. In many cases, lenders will set a minimum 620 FICO credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. If you don’t have good credit… Some lenders provide guidance and services to increase credit scores. Although not the norm there are even a few home equity loan options for borrowers with low credit scores.
Home equity: You need to have a minimum amount of equity — at least 15% — to qualify for a home equity loan. Lenders often express this as a maximum 85% loan-to-value (LTV) ratio. The LTV ratio measures your outstanding mortgage balance against your home’s market value. Ultimately, the more equity you have, the more money you can borrow.
It’s important to note that although there are general industry standards, each lender has their own set of requirements and guidelines. To learn more, contact your lender directly.