If you have a house, you can take equity on it and borrow money on equity if necessary. However, there are certain requirements from the lender for the home equity line. So when you apply for a loan, the requirements of the lender are covered through this article.
What is a HELOC and a home equity loan?
Home equity line of credit is a revolving credit line that will lend you money by pledging your home. HELOC has a fixed draw period and credit card limit by the lender. You can borrow funds according to the credit card limit and that borrowed money can be used for home renovations, or any major expenses. You can pay a minimum monthly fee to repay the loan.
Although the duration of the draw is determined by the lender, most of the time it is 10 years. During this period, you will have to pay the minimum interest rate. Then, the repayment period is fixed which is 10 to 20 years. During this period both the principal and interest of the borrowed money have to be paid.
HELOC offers multiple benefits including:
Flexibility: The biggest advantage of HELOC is that it gives flexibility on both draw period and payment period. You will be able to borrow up to 85% of the value of your home. But if you have a first mortgage, you have to deduct it.
Low APR: Another advantage of HELOC is that it has lower interest rates than credit cards. It also has lower primary costs.
Few restrictions: You have the freedom to use the borrowed money. You can spend money on home improvement, loan repayment, college fund or travel etc.
Like HELOC, home equity loans lend money on home equity. A home equity loan is a lender that lends you a certain amount of money. The borrower has to repay this money in installments within the stipulated time. Home equity loan interest rates are fixed, but HELOC interest rates are variable.
Advantages of Home Equity Loan:
Estimated Payment: The principal and interest rate will be fixed on the monthly payment.
Low cost: Another advantage of a home equity loan is that it offers lower interest rates than credit cards.
Longer terms: Home equity loans are long-term, ranging from about 5 to 30 years.
Requirements to borrow from a home equity line
Home equity loans and HELOCs come with certain advantages and disadvantages. So choose the best one that suits your budget by considering your needs. However, the requirements for a home equity loan and a home equity line of credit are the same.
Although the requirements depend on the lender, some of your general requirements are:
- A percentage of your home’s available equity.
- Good credit score.
- Adequate monthly income
- Low debt to income ratio
- Previous payment history
Keep 15-20 percent equity available
Equity is how much you owe from the market value of your home. Lenders measure your home equity using a loan-to-value ratio. This will help determine if you are eligible for a loan.
You can easily find your home LTV. Divide the value of your home loan into your mainstream appraisal.
For example, your loan balance is $ 200,000 and your home valuation is $ 700,000. Then divide the balance by valuation.
Then you get 0.28 or 28 percent. And this is the LTV ratio of your home. Therefore, the LTV ratio of your home is 28 percent and the remaining percentage i.e. 72 percent is your home equity.
It determines how much money you will borrow on your home equity. You can borrow up to 85 percent of your home equity. Simply put, the sum of mortgages and current debt cannot exceed 85 percent of your home equity.
As per the example above, 85% of the value of the house is $595,000. The equity present for borrowing after deducting the mortgage is $428,400.
Pro tips on building home equity:
- Try to pay the mortgage bill as soon as possible. If you are able to repay the mortgage, it will increase your home equity. Paying more than the monthly minimum payout will increase home equity faster.
- You can increase its equity by renovating your home. Tax benefits are available by renovating a home using a home equity loan.
Credit score: At least 600
Credit scores are essential for approval in most banks. If you have a credit score above 700, you are considered eligible for a loan. However, those with a credit score of 621-699 are also eligible for loans.
However, for those with a credit score of less than 620, many lenders lend, but only if there are conditions. The borrower must have more equity available in the home and will bear less debt than income. HELOC offers the borrower high interest rates, low loans and short term.
You need to increase your credit score before applying for home equity. To improve your credit card score, you need to pay regularly for a credit card or loan. Pay off debts as much as possible and refrain from applying for credit cards.
If you have a high credit score on your credit card, the favorable interest rate will be lower. Debt will save you a considerable amount of money for life. The lender will also check your cricket score to see if you will be able to repay the loan. So a good credit score will make it easier for you to get a loan.
Debt to income ratio
Another important factor that lenders consider when making a loan is the debt to income ratio. The lower your DTI percentage, the better for you. However, the DTI percentage is considered 43% or less. Above all, the percentage of eligible DTI depends on the lender. Some lenders will lend you 36 percent off your monthly bill. Other lenders offer from 43% to 50%.
The lender will first consider the total monthly bill of your home to determine the DTI. These monthly payments include mortgage principal, homeowners insurance, interest, direct liens, taxes and homeowners association arrears, among other arrears that are a legal liability.
The DTI ratio is calculated by dividing the total debt by your total monthly salary. Monthly salary includes salary bonus, commission, and other sources of income. To calculate your DTI and you will know if you are eligible for a home equity loan. And repay your previous loan to get the best ratio.