Are you looking to make improvements to your house or pay off some of your high interest credit card or other debt? Well if you have been paying your mortgage payments for years or your home’s value has increased significantly, you may be eligible to take out a substantial size home equity loan. Here are the home equity line of credit requirements:
What it needed for a home equity loan
There are basically three main ways you can go about borrowing off the extra equity you have accumulated on your home:
- Take out a home equity loan
- Open up an equity line of credit on your home
- Or choose a cash-out type of refinancing
Before you just jump in and take out one of these loans make sure you are aware of the pros and cons of each. Also, strongly consider your needs as to the size of home equity loan you need.
Before you actually apply for a home equity loan you should be keenly aware of three things that banks will look at before approving your home equity loan:
- How much equity you built up in your home.
- What your current credit score is.
- And you will need to know your approximate debt-to-income ratio.
1. Determine the Value of Your Current Home Equity
The definition of home equity in its simplest form is your home’s value less the amount you still owe on it. Your bank will determine based on these figures what is called an LTV (loan to value ratio). This is your current home loan balance divided by your home’s current worth.
Example: you owe $75,000 on your home loan and your home is currently valued at $225,000. Your LTV ratio is 33%. ($75,000/$225,000=.33 or 33%)
If you don’t know your home’s current worth you will need to ask a professional to do an appraisal.
If you are looking for a home equity line of credit (HELOC), your bank will calculate what is known as CLTV (combined loan to value ratio). It calculates it by adding the requested loan amount to how much you still owe on your home and then divide it by the appraised value.
Example: $75,000 (current debt in your home) + $100,000 (loan asking amount)/$225,000 (your home’s current appraisal value) = .077 or a CLTV of 77%
2. How your Credit score Impacts Your Home Loan
Unfortunately (or not), the equity alone that you have in your home is not enough to secure you a loan. Your bank will also look at your credit score to make sure you are a responsible money handler.
A credit score of 700+ almost assures you of getting the loan. A credit score of 625-699 is hit or miss at having a loan approved at higher interest rates. And anything less than a credit score of 620 will most likely result in a loan rejection.
You can check your credit score here on services like CreditKarma. The three main credit reporting agencies; Experian, TransUnion and Equifax, are also required to give you a totally free credit report once a year.
If you find any mistakes on it there are steps you can take to get your credit score adjusted.
3. Debt-to-Income Ratio
Most people do not know their debt-to-income ratio (DTI) off-hand. It’s a big consideration for banks before approving any home equity loan applicants. The lower your DTI the better chance you have at getting your home equity loan approved.
Lenders will add together your legal liabilities. These include deposits you make on your mortgage each month, other loan payments you have, taxes, liens. In fact, your legal liabilities really comprise any other payments you have that are guaranteed to someone each month. The lender will then divide this figure by your monthly gross income to determine your DVI.
There are ways to improve your debt to income ratio also. This can be done by simply earning more money, paying down your higher interest credit first and also continuing to pay down your other debts too.
Check out: I need a loan now with bad credit
How to qualify for a home equity loan with bad credit
Like we mentioned, the bank will look at different things when considering lending you a home equity loan. If you have a low credit score, a high home value (equity) will definitely help you. A low debt-to-income (DTI) ratio can only help in the process too. If you can prove that you are someone responsible with not too much debt but that you just happened to have a low credit score for I don’t know what reason – you will stand a chance to qualify for a home equity loan.
Home equity loan income requirements
Needless to say, the higher the income the better. But this is not just it. The lenders will look at how much debt you owe in comparison to your income. If you make $300,000 but have a huge amount of debt, you will have a hard time getting a home equity loan. Your DTI, debt-to-income ratio, will be high. On the other hand, if you make $30,000 but have $2,000 of debt, even with a low credit score, the chances are the lender is going to approve your loan request.
How long does it take to get a home equity line of credit approved
A successful process will typically happen in 30 to 45 days. It just takes time for the lender to make sure you qualified for a loan (the underwriting process). If the answer is negative, you will probably be able to know before 30 days.
A personal loan vs. home line of credit
If you are in need of cash and you don’t think (better if you check with a lender before) that you don’t qualify for a home line of credit, you should check out personal loan apps and our article on how to get a personal loan. If you are in need of $25 to a few hundred dollars, we recommend apps like GoChange or apps like MoneyLion.