January 4th, 2020 10:50 AM by Jackie A. Graves, President
home equity can be a smart way to borrow cash to pay for home
improvement projects or pay off high-interest debt. If you have substantial
equity in your home because you’ve either paid down your mortgage or the home’s
value has spiked, you might be able to snag a sizable loan.
How to get a home equity loan
three ways to tap into your home’s equity: a home equity loan, home equity line of
has its own set of pros and cons, so it’s important to consider your needs and how each
option would fit your budget and lifestyle.Before you
apply for a loan, you should:
1. Have at least 15-20% equity in your home
the difference between how much you owe and how much your home is worth.
Lenders use this number to calculate your loan-to-value ratio, or LTV, a factor
used to determine whether you qualify for a loan. To get your LTV, divide your
current loan balance by the current appraised value.
your loan balance is $150,000 and your home is appraised at $450,000. Divide
the balance by the appraisal and get 0.33, or 33%. This is your LTV ratio.
your home’s value entails an appraisal. Your lender might request a certified appraiser to inspect
For HELOCs, you 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.
example, if you want $30,000 and you owe $150,000, then you would add those
numbers together and divide them by the appraised value. If the home is valued
at $450,000, then the equation would look like this: ($150,000 + $30,000) /
$450,000 = 0.4, or 40%. Your CLTV is 40%.
2. Check your credit score
equity is not enough to secure a loan from most banks. A favorable credit score
also is essential in order to meet most banks’ requirements for a HELOC.
Shekhtman, a mortgage broker at LBC Mortgage in Los Angeles, says that banks
are still weary from the 2008 housing crash.
don’t have good credit or you owe a lot already, it’s going to be more
challenging to get a loan from one of the big banks,” Shekhtman says. “Banks
lost a lot of money during the recession, and now they’re much more careful
about who they lend to.”
score above 700 most likely will qualify you for a loan, as long as you meet
the equity requirements. Homeowners with credit scores of 621 to 699 might be
approved, but most likely at higher interest rates. Those with scores below 620
might still be able to qualify for a home equity loan, but lenders may require
the borrower have more equity in their home and carry less debt relative to
You can get your credit report and score for
Bankrate. Some credit card companies and banks will offer cardholders their
score for free, so be sure to check with your financial institution before you
pay for your score.
Consumers are entitled to a free credit report every year from each of the
three main credit-reporting agencies: Experian, TransUnion and Equifax.
credit reports to make sure there are no errors. If you find a mistake, such as
a late payment, report the problem to the credit bureau that’s showing the
information. Your score likely will improve once the error is removed.
3. Have a debt-to-income ratio between 43 to 50%
Your debt-to-income ratio, or DTI, is also a
factor lenders consider with home equity loan applicantions. The lower the percentage, the better. The
qualifying DTI ratio varies from lender to lender, but some require that your
monthly debts eat up less than 36% of your gross monthly income. Other lenders
are willing to go as high as 43% for your DTI.
will add up the total monthly payment for the house, which includes mortgage principal,
interest, taxes, homeowners insurance, direct liens and homeowners association
dues, along with any other outstanding debt that is a legal liability.
total is divided by the borrower’s gross monthly income — which includes base
salary, commissions and bonuses, as well as other income sources such as rental
income and spousal support — to come up with the DTI ratio.
improve your DTI by earning more money, lowering your debt or both.
Before you apply for an equity loan, be sure to calculate your DTI. If you’re above
the optimum ratio, pay off as much debt as you can. Get a part-time job if you
have to. Pay off loans with the highest interest rates first. The money you
save on interest can be put toward paying off other debts. If you’re not sure
how best to apply your extra money, look for snowball and avalanche debt
payment plans; these offer simple instructions on the order in which to pay your
Other factors to consider
also improve your home equity loan approval odds and term amounts in a handful
of other ways, including:
your credit score isn’t perfect or your debt-to-income ratio is on the verge of
being too high, you may still have a chance to be approved for a home equity
line of credit if you are successful in demonstrating these factors.
a mix of factors to determine whether you can be approved for a home equity
line of credit. One of the major factors is income, which will be scrutinized
to make sure you’ll be able to repay the loan. A higher income can help cancel
out the appearance of debt and give you a debt-to-income ratio.
credit score is factored into the bank’s decision to issue a HELOC, your
broader credit history also affects your odds of being approved. For example,
if you carry an exorbitant amount of debt, your application may be denied even
if your credit score is above 750.
in the process of rebuilding your credit score and your credit history reveals
a steady incline from the 500s (or lower) into the mid-600s or higher, you have
a better chance of approval, provided you don’t have a mountain of debt to
improve your HELOC approval odds — as well as your loan terms — by maintaining
a record of paying your bills on time. A pattern of timely payments will show
the lender that you’re a reliable borrower. You may even be able to get a loan
with a few missed payments on your credit history, but you’ll need to show your
lender that your recent payment history is solid.
2019 federal and state requirements for home equity loans
All lenders must follow state and federal rules when lending
money. While federal rules are the same everywhere, state rules can change what
is available to lenders from one area to the next.
Banks generally allow you to take only up to 85% of equity out
of your house. If your home is a rental or investment property, this number
drops to 75%. One of the federal rules that changed in 2018 is in regard to the
tax deductions you can get for the interest on your home equity loan. Now, only
the interest for purchases used to build or improve the home you are securing
The biggest differences from state to state are more about the
cap on interest rates. High-risk lenders may offer a high interest rate equity
loan though some states cap the maximum interest that can be charged.
Lenders are not all the same, and the offers that you get will
depend on the lender you work with. One factor might be your relationship with
the bank. If you have money in the bank or your primary mortgage is with the
bank, there is often a discount in interest rate for existing customers. Credit
unions where you are a member may also offer some lending discounts.
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