Do you own a home and need to borrow money? If so, you may be considering a home equity loan or a home equity line of credit (HELOC). But before you make any decisions, you need to know the requirements and borrowing limits associated with these types of loans.
Homeowners have the advantage of using the equity in their homes as collateral for borrowing money. Home equity loans and HELOCs are popular options for those who need funds for home improvements, debt consolidation, or other expenses. However, each type of loan has different requirements and borrowing limits that you need to be aware of before applying.
In this article, we will discuss the requirements and borrowing limits for home equity loans and HELOCs. Understanding these factors will help you determine which loan option is best for your financial situation and how much money you can borrow. So if you’re a homeowner looking to borrow money, keep reading to learn more about home equity loans and HELOCs.
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Is It Hard To Get Home Equity Loan?
With the proper paperwork and qualifications, obtaining a home equity loan should be relatively straightforward. On the other hand, HELOCs levy more stringent restrictions that make them slightly less accessible to some individuals. If you do not meet HELOC requirements, there exist alternative routes you can explore to cash in on your home’s equity.
Requirements for a Home Equity Loan or HELOC
The amount you still owe on your home versus its current market value determines your “home equity.” A home equity loan–sometimes called a second mortgage–would allow you to borrow equity using your home as collateral. Your debt-to-income ratio, credit score, income history, and reliable payment history all come into play when determining the eligibility and limitations of this loan.
Most home equity loans or lines of credit require a debt-to-income (DTI) of 43% or lower upon factoring in the new loan amount. To reduce your DTI, you either must pay off considerable portions of your debt or start making more money. Maintaining a low DTI will increase your credit eligibility and make it easier to obtain more favorable terms and lower interest rates when borrowing in the future.
Your DTI ratio calculates the ratio between your monthly income and your standing monthly rate of debt. If you add up the minimum monthly payments on every credit card or loan in your name and divide that sum by your gross monthly income, you have your DTI ratio.
Most lenders set the minimum HELOC credit score requirement at 620, though others may require one as high as 680. Higher credit scores help you qualify for home equity loans or HELOCs with lower interest rates and monthly payments.
Your credit score provides lenders with number rankings that help predict the likelihood you have of paying back a loan on time. Credit bureaus use a scoring model that factors in your payment history, the number of loans in your name, your total debt and available credit, and many other factors to deduce your credit score.
While many lenders might not specify income requirements for home equity loans or HELOCs, they’ll factor in your income when assessing your ability to pay the pending loan and how comfortable they feel lending you. To verify your income, lenders typically ask you to provide documents like W2s and pay stubs with your loan application.
Your income history directly impacts other aspects of home equity loan requirements, like your DTI and credit limit. Additionally, higher income translates to lower risk, as lenders will see you as less likely to fall behind on payments if you have considerable, consistent income.
Reliable Payment History
Even though your payment history already gets factored into your credit score, lenders pay special attention to this detail to fully grasp your level of risk. If they discover many delinquent or late payments under your name, they will balk at lending you large sums of money, even with a good credit score. Lenders offering home equity loans or HELOCs do not receive repayment until after your first mortgage gets reimbursed, so they more commonly steer clear of high-risk borrowers than do first mortgage lenders.
How Long Does It Take To Get a Home Equity Loan Approved?
Both home equity loans and HELOCs can take anywhere between two weeks to two months to receive approval. A handful of factors alter the timetable along that spectrum, including:
- How well you have prepared: The more readily available documents, the smoother your application process will proceed.
- The underwriting process: Depending on your financial situation, digging through your credit score, DTI, and other qualifying factors could take the lender some time.
- Length of the appraisal: A third-party appraiser must confirm your home’s value, and they often have busy schedules that slow down the approval process.
- Length of closing: If closing requires an attorney present in your state, you’ll also have to work around that attorney’s busy schedule.
Determining your Home Equity Loan Borrowing Limits
Once lenders can determine your DTI, credit score, income, and payment history, they can begin to structure loan terms that correlate to your perceived level of risk. The more they see you as a liability, the higher the interest rate would be on your home equity loan or line of credit. They may reject your loan request altogether if your risk factor projects as too extreme.
Since you’re borrowing against the value of your home, lenders will never offer more than the value of the equity you hold in your home at the time of the deal. The maximum you can expect in a home equity loan or HELOC would equate to 95% of your home’s total equity.
Find Out How Much Your Home Is Worth With an Appraisal
Before anything else, you need to find out how much equity you currently hold in your home through an official appraisal. An appraisal entails an unbiased, third-party professional inspecting your home and deciding its market value. Regardless of the type of loan, lenders will expect an appraisal to know how much they can sell your home for in the event of default.
An accurate appraisal benefits the lender and can protect the borrower’s interests in unison. A higher-than-expected appraisal offers your more equity to access, whereas a lower appraisal may hinder your goals with a lower amount to borrow. Appraisers rely on comparable properties in the area to determine your home’s market value and the lender will use this metric to determine how much funding you’ll receive on your second mortgage loan.
Calculate How Much Equity You Have in Your Home
The difference between your home’s market value and the amount you owe on your mortgage determines the available home equity. Lenders use your equity to determine your loan-to-value ratio (LTV), which they then utilize to decide the amount they are willing to lend.
To calculate your LTV, divide your current mortgage balance by your home’s appraised value. The resulting percentage shows your LTV and the inverse of that percentage constitutes your equity; for example, an LTV of 40% means that your home has 60% equity. These numbers determine the maximum amount of your loan and whether or not you’ll receive approval. You can typically borrow up to 95% of your home’s value minus the value of the mortgage you still owe.
Can I Get a Home Equity Loan Without a Job?
You do not need a job to qualify for a home equity loan, though being unemployed creates some disadvantages. A lack of steady income could distort your debt-to-income ratio, which would eventually disqualify you from home equity loan or HELOC eligibility.
Lenders tend to exercise less caution in providing home equity loans to suboptimal borrowers because these loans are “secured,” meaning the lender can force you to sell your house to pay them back if you fail to do so of your own volition. Retired people, self-employed individuals, and unemployed borrowers can capitalize on home equity loans as long as they carry adequate home equity. A cosigner might also help legitimize a loan for someone without a job.
How Often Do Home Equity Loans Get Denied?
While HELOCs may be easier to obtain than other loans, it is still possible, if not common, to be denied when you apply for one.
Even if you comfortably meet all the previously stated criteria, home equity loans and HELOCs can still get denied due to factors outside your control. For example, macroeconomic trends may play a large role in the HELOC approval process. Many banks have been slow to begin issuing these loans and lines of credit again following the COVID-19 pandemic that led to economic turmoil. Even the Great Recession of 2008 has left certain financial institutions nervous about lending out more money than they already had to absorb.
That said, the main reasons for home equity loan denial include the following:
- Poor credit score
- Low home equity
- Shaky employment and income history
- Poor debt-to-income ratio
- Unreliable payment history
How and Where Can I Apply for a HELOC?
Applying for a HELOC shouldn’t take more than an hour or two of your day and can be accomplished at most banks, credit unions, or specialized lenders. Though widely available, you’ll still want to take your time and shop around when choosing a HELOC or home equity loan.
Lean toward loans with a lower annual percentage rate (APR), carry no fees or prepayment penalties, and clearly state their terms. Bad actors abound in the loan universe, so take care to find a properly certified and trustworthy lender. Remember that an adverse loan could result in you losing your home. Proceed with austerity.
Alternatives to Home Equity Loans
While taking out a home equity loan might seem like an all-around grand slam, other alternatives might better suit your needs and circumstances. If you do not meet all of the standard home equity loan qualifications like a credit score above 680, solid employment history, or an abundance of equity in your home, consider looking into one of the following alternatives:
- Personal loans: While these tend to carry higher interest rates, personal loans bear no risk of foreclosure if you become incapable of paying.
- Cash-out refinance: Taking out a new mortgage at a higher amount than what you owe on your current mortgage allows you to pay off your old mortgage and keep the difference in cash.
- Reverse mortgages: Senior citizens often utilize reverse mortgages to financially help them through retirement. The borrower receives a lump sum or monthly stipend they do not have to pay back until they pass away or move from the residence. Reverse mortgages almost always result in the eventual sale of the home.
- 0% APR credit cards: These cards make sense for a short-term loan, as they offer zero interest during a limited promotional period.
- Credit counseling: Credit counselors can help you create a debt management plan, lend expert advice, and even guide you toward lenders with lower interest rates and fees.