Your home equity is your
bargaining chip. If your home has sufficient equity that is its market value exceeds your mortgage’s outstanding balance, you could refinance to improve your current mortgage rates/terms or you could use it to tap home equity loans for various reasons.
How do you qualify for home equity loans? Find out here.
Find home equity lenders here, too.
Home Equity Loans
These are second mortgages that give access to a line of credit (home equity line of credit) or a lump sum (home equity loan).
The uses of home equity loans, as they are collectively called, are many. They can go toward debt consolidation, home improvement, and college education.
To make it easier to remember:
- Home equity loan (HEL) offers a lump sum amount with a fixed interest rate to be paid for a fixed period of time.
- Home equity line of credit (HELOC) is like a credit card with a revolving line of credit and a variable interest rate.
Qualifying for a Home Equity Loan
Home equity loans are mortgages that play second fiddle to the
first-lien mortgage, e.g. FHA loan, VA loan, or conventional loan.
Nevertheless, you have to go through an approval process and pay closing costs just like with your first mortgage.
There’s no definite answer to what a “good score” is required for a home equity loan. One lender might ask for a minimum score of 620, another might require 680. What is nonprime for a lender may be prime for another, vice versa.
Between the above types of home equity loans, HELOCs usually ask for higher credit scores.
You can check with the
lenders regarding their minimum credit scores for home equity loans.
Let’s help you find a lender.
Is your current income enough for you take on another mortgage obligation. This will be determined by the debt-to-income ratio.
You might have across front-end and back-end DTI ratios. When it comes to mortgages, lenders look at the front-end ratio which shows how much of your monthly income goes to your housing expenses (rent or mortgage payments).
There are varying standards for this front-end ratio, although an ideal one is anything below 40% or 43%. More recently,
Fannie Mae has increased its maximum allowable DTI ratio for its conventional mortgages to 45%. Ask lenders about their DTI requirements.
What you can borrow out of home equity loans can be 80%, 85% or 90% of your property’s value, excluding the mortgage debt.
Remember that a home equity loan debt adds to your existing mortgage on the home so it’s imperative to have enough or significant home equity to qualify for one.
That’s why lenders run another round of appraisal to determine the value of the property.
Rates on HELOCs and HELs vary lender to lender. Because these loans are held by lenders in their portfolio, their pricing can be unique and specific to the bank/lender making them in line with overall lending regulations.
Whether to get a fixed-rate HEL or a variable-rate HELOC would depend on what you intend to do with the money. If you require a definite sum in mind, use HEL. If you plan to make home improvements and have no idea about the costs, opt for a HELOC.
Shopping for Home Equity Loans
It’s not usual to see a borrower with a perfect, unblemished credit. While credit scores play a major role, there are other factors involved in making loans including home equity loans.
You might have a low score but your low DTI ratio and plenty of equity could make up for it. Always make it a habit to shop for loans and rates so you can make an informed and wise decision.
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