If you are a house owner who has paid a chunk of your mortgage or whose house has earned value, you may be able to take a loan secured by your home equity. However, having equity in your home is not the only requirement to qualify for a home equity loan.
Here's what you need to know about the requirements for a home equity loan. By understanding thumb rules, you can decide if a home equity loan is right for you and prepare accordingly.
Learn more: What is a home equity loan? A complete overview
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Home equity describes the difference between the value of your home and your remaining mortgage balance. For example, if your home is worth $ 400,000 and you still have $ 300,000, you still have 75% – which means you have 25% equity.
A home equity loan is a type of second mortgage that allows you to borrow from the equity you have built. It's a guaranteed loan, so it uses your house as a parallel.
Home equity loans typically have fixed interest rates, and the loan earnings are paid as a lump sum. To adopt a home equity loan, you will make regular monthly payments that are suspended over the ad -paid season, which can be as long as 30 years.
The amount of money you can access through a home equity loan depends in part on the value of your home market because equity is counted by removing your mortgage balance from the market value.
You are deeper: How much is your house value? How to determine your home value.
Lenders must meet several essential borrowing criteria to qualify for a home equity loan. Although the specific requirements vary from one mortgage lender to another, these are the typical standards you must meet to qualify for a home equity loan:
Most lenders offer only home equity loans to homeowners with at least 15% to 20% equity. For example, let's say your home is currently worth $ 400,000, and you want $ 350,000 on your mortgage. Most lenders would not allow you to take a home equity loan because only $ 50,000 has accumulated in equity, at 12.5%.
A house owner would need at least $ 60,000 to $ 80,000 in equity with a house worth $ 400,000 to reach the minimum of 15% to 20% required by most lenders.
Also, most lenders will not allow you to borrow more than 80% of the equity you have built in your home. So if you have $ 80,000 worth of equity in your home, your lender will generally cap your home equity loan at $ 64,000 – or 80% of the $ 80,000 in equity.
Read more: 7 ways to build equity in your home
Good credit and low-debt-to-inside ratio
Lenders need to trust that you will repay your home equity loan. That's why they set minimum credit scores and the highest debt-to-back ratios to qualify for this type of second mortgage.
Although the credit requirements for home equity loans vary by lender, the minimum typical required credit score is 680. However, an even higher credit score can help you qualify for lower interest rates and better terms .
The Debt-to-Incum (DTI) ratio calculates how much of your monthly income goes towards your compulsory debt payments. Typically, lenders prefer DTI ratio of 43% or less, although some will need a slightly lower or higher ratio. Like getting a higher credit score, a lower DTI ratio can increase your chances of applying for improved home equity loan rates and terms.
Learn more: What is the ratio of debt-to-ins, and how do you figure it out?
You will need to check your income to be eligible for a home equity loan. The mortgage lender asks for proof that you earn enough to afford the payments on your home equity loan. You may need to provide pay bumps, W-2s, or tax returns to test your income level.
You are deeper: What percentage of your income should go towards a mortgage?
Homeowners insurance does not just protect you from an unexpected loss – it also protects your lender in case of something happens to your home. This is why mortgage lenders require homeowners to carry appropriate insurance as a loan condition.
It's the same for home equity loans. To qualify for a home equity loan, you must provide proof of your current homeowners insurance policy. Your insurance policy protects the borrower's investment in your home in case of disaster.
Read more: What does homeowners insurance pay?
Home equity loans usually need to be evaluated to determine the current home market value. The home appraisal ensures that the mortgage lender knows exactly how much equity you have in the house. That way, the lender can defend himself from borrowing a lender too much money.
Keep learning: How Home Evaluation works
Preparing the necessary documentation and information before you start your home equity loan application can make the process easier. Most lenders will need these documents to apply for a home equity loan:
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Your latest mortgage statement: This document shows the remaining balance on your basic mortgage.
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Proof of Income: This could include your latest tax return, W-2s, and pay stumps. You will also need proof of employment.
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Bank Statements: The mortgage lender may want this information to determine your reserves before you shoulder more debt.
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Insurance Documentation: The lender will require a copy of your homeowners insurance policy and any hazard or flood policies.
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Identify: Make sure your Social Security Number, Driver's License, or Passport are at hand.
The borrower will also need to see your home appraisal, although the lender usually orders the appraisal once you apply for the loan and receive from -approval.
Read more: How to choose between a second mortgage and refinancing
A home equity loan lender could deny your request for various reasons. Lenders may reject homeowners without enough equity, even if they could otherwise qualify. But having enough equity in your home does not guarantee a loan. If your credit history is poor, you have a high debt-to-back ratio, or you can't prove that you have enough income to repay your loan, a borrower could reject your home equity loan application.
Usually, it is – most lenders need an evaluation for a home equity loan because it assesses the value of your home, which helps determine the amount of equity you have. Having an appraisal ensures that neither borrower nor lender use a swollen value to indicate the level of equity.
Yes, the term “second mortgage” refers to any new loan you pull out using your home as parallel when you have a first mortgage already secured by the home. That means that home equity loans and home equity credit lines (helocs) are two types of second mortgages.
This article was edited by Laura Grace's Tarpley.