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How Can I Qualify for a Home Equity Loan?

How Can I Qualify for a Home Equity Loan?

March 18th, 2020 | Home Equity

Whether you are remodeling your kitchen, consolidating several big debts, or paying for your child’s college tuition, a home equity loan can be one of the most cost-effective ways to borrow money. Interest rates are lower on mortgages than on almost any other type of loan. But how do you know if you can qualify for a home equity loan? Here’s what you need to know to be approved for one of these popular loans:

How a Home Equity Loan Works

A home equity loan is a second mortgage. It uses your home as collateral and allows you to borrow against your existing equity. Your equity is the difference between your home’s value and the amount you still owe on your first mortgage. For example, if your home is worth $300,000 and your current mortgage balance is $200,000, you would have $100,000 in equity and could take a portion of that out as a home equity loan. These loans offer fixed rates and repayment terms of anywhere from five to 30 years.

Home Equity Loan Requirements

While borrowing requirements will vary from lender to lender, there are a few that are standard across the board. 

Loan-to-Value Ratios

Most lenders want you to have at least 15% to 20% in equity in order to pull some of it out. Some lenders will want you to have more than that because they like to keep borrowers' total mortgage commitments to 80% or less of the home’s value. If your loan-to-value ratio is greater than 80% after you take out a home equity loan, you may pay a higher interest rate. The value of your home will be determined by a new home appraisal in most cases.

Debt-to-Income Ratio

Lenders want to minimize the risk of default, so they will check your income and debts to determine if you can actually afford a new loan. First, lenders will want proof that you have solid income and are likely to keep that income in the future. Then lenders will take a look at how large your debts are compared to your income. Typically, for a home equity loan, lenders require that your debt-to-income ratio is less than 43%. Some will allow your debts to make up a larger portion of your income, but again, you may have to pay more in interest for that privilege.

Credit Score & History

Your credit score and history of timely payments will be important to qualifying for a home equity loan. Most lenders will require a credit score of 620 or higher. The higher your credit rating, the better your interest rate will be. And if you can demonstrate that you have been punctual with your current mortgage payments and other debt, your application will be more likely to be approved.

In addition to home equity loans, there are alternative loans that can help you accomplish your financial goals. You could consider a home equity loan of credit or a cash out refinance. The requirements are roughly the same for all of them but a HELOC gives you a loan limit and allows you to borrow periodically like a credit card. A cash out refinance replaces your existing mortgage with a single larger loan,with you pocketing some of your equity in cash. No matter what type you choose, a home equity loan can help you get the money you need at the most affordable rates around. 

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Prime 1 Bancorp, Ltd is not affiliated with any government organization or bank nor do we act on behalf of the FHA or VA. This material is not from HUD or FHA and has not been approved by HUD or a government agency. We are not a Federally chartered or State Chartered Bank. We are an we are an Illinois Residential Mortgage Licensee by the Office of Banks and Real Estate License #MB.6761138, a Colorado Registered Mortgage Brokerage by Division of Real Estate, a Florida Residential Mortgage Brokerage Licensed by the Office of Financial Regulation License #MBR1930 dba Prime 1 Mortgage Inc, a California CFL Licensed Mortgage Brokerage by Department of Business Oversights 60DB055973 and a Texas SML Licensed Mortgage Brokerage by the Texas Department of Savings and Mortgage Lending. Prime 1 Bancorp, LTD Corporate Office is located at 2720 S. River Rd Suite 50, Des Plaines, IL 60018 our Toll Free Number is 888-205-3737. NMLS: 1434638

Loan product availability is subject to qualification of the borrower and loan approval after full review of the file. Not every applicant qualifies or is eligible for every loan program. Some loan products may not be available in all states. Loan approval, note rate and annual percentage rate are dependent on factors including, but not limited to, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms and annual interest rates are subject to change without notice. NMLS: 1434638

Figure: 7 TAC §80.200(b)

"CONSUMERS WISHING TO FILE A COMPLAINT AGAINST A COMPANY OR A RESIDENTIAL MORTGAGE LOAN ORIGINATOR SHOULD COMPLETE AND SEND A COMPLAINT FORM TO THE TEXAS DEPARTMENT OF SAVINGS AND MORTGAGE LENDING, 2601 NORTH LAMAR, SUITE 201, AUSTIN, TEXAS 78705. COMPLAINT FORMS AND INSTRUCTIONS MAY BE OBTAINED FROM THE DEPARTMENT’S WEBSITE AT WWW.SML.TEXAS.GOV. A TOLL-FREE CONSUMER HOTLINE IS AVAILABLE AT 1-877-276-5550.

THE DEPARTMENT MAINTAINS A RECOVERY FUND TO MAKE PAYMENTS OF CERTAIN ACTUAL OUT OF POCKET DAMAGES SUSTAINED BY BORROWERS CAUSED BY ACTS OF LICENSED RESIDENTIALMORTGAGE LOAN ORIGINATORS. A WRITTEN APPLICATION FOR REIMBURSEMENT FROM THE RECOVERY FUND MUST BE FILED WITH AND INVESTIGATED BY THE DEPARTMENT PRIOR TO THE PAYMENT OF A CLAIM. FOR MORE INFORMATION ABOUT THE RECOVERY FUND, PLEASE CONSULT THE DEPARTMENT’S WEBSITE AT WWW.SML.TEXAS.GOV.