Can I Qualify for a Home Equity Loan and What are the Terms?

Can I qualify for a home equity loan? That is one of the necessary questions that need an exact answer. Basically, a home equity loan is such a huge investment in the property field. However, you need to be aware of the home equity loan requirements. Check this article below to learn about the requirements.

Home Equity Loan Overview

The first thing is to answer the question about a home equity loan. A home equity loan or a second mortgage is a round-sum loan with the function of becoming your house assurance. The second mortgage offers an opposing rate level than the other personal loans or credit cards. 

However, your second mortgage is not being funded by a loan, yet it is the value of your own house. This policy holds an exact amount of loan that has to be completed in a certain time. 

For instance, if you hold the payment term for 5 years with ensured cost, you can complete the monthly payment easily. You can calculate the value of your house by subtracting the stuff you own from the current market value. So, the higher the value of your house, the higher the rates you could get for the home equity loan.

Home Equity Loan Requirements

You will know the answer to the question “Can I qualify for a home equity loan?“ if you already acknowledge its requirements. Before you meet the loan company to discuss the home equity loan, read the information below.

1. Minimum Percentage of Equity in Your Home

The rule of subtracting your stuff from market value is necessary to examine the minimum percentage of your second mortgage. If the question can I qualify for a home equity loan, the lender would know the answer through this method. The minimum percentage is at least 15% up to 20%.

On this occasion, if you have a loan balance of around $150,000, the auditor could give you $450,000 as your home value. Based on that amount, you have a Loan-to-Value (LTV) of around 33%, and the rest of the percentage is your home equity value. 

The percentage shows you how much you can borrow for a loan. You could even receive more than 80% of your second mortgage stake from the loan company. Regardless, the total of your current mortgage and your required home equity loan would not be more than 85% of your own home’s value.

2. Good Credit

A good credit score will always be necessary for any circumstance, including to qualify for a home equity loan. The lenders will approve your second mortgage form if your credit score is around 680 or higher. Sometimes, the loan company prefers a 700 credit score or 620 up to 679 approved.

Some loan company is brave enough to extend loans to people with credit score lower than 620 with certain terms and conditions. The loan company could ask the borrower to have higher equity in their home. 

On this occasion, having a good debt with their income also includes the right terms and conditions for a second mortgage. People with bad credit scores would have high rates, lower loan costs, and shorter times of loan. Therefore, you must pay more attention to your credit score before applying for a loan.

3. Low Debt-to-Income Ratio

DTI (Debt-to-Income) ratio is one of the essential factors that becomes the consideration of the loan company to approve and qualify you for a second mortgage form. 

Before you apply for a second mortgage, calculate your DTI first and acknowledge that it is of good standard. The lower the percentage of your DTI, the better you could get.

Further, if you throw the question “Can I qualify for a home equity loan?“ to your lenders, they could review your DTI ratio. Some loan companies put a ratio of no more than 36% of your gross monthly income. Yet, the other loan companies offer more than 43% up to 50% of your monthly income.

The lenders could do a sum over your monthly payment for the house, such as mortgage principal, taxes, interest, and home insurance. Additionally, some of the necessary elements, including homeowners association dues and outstanding debt, become the consideration of the loan company.

The factors in the outstanding debt in your monthly income include bonuses, base salary, commissions, and secondary salary sources. Moreover, the loan company would determine your DTI by those essential elements of legal liability to qualify you as a receiver for a home equity loan.

4. Sufficient Income

What’s more, the necessary factor to be considered is your sufficient income. Many lenders would evaluate and qualify you for a home equity loan through your monthly income. This term is important to enlighten the loan company about your capability to pay your debt loan.

The lenders most conceivable would take approval and qualify you to receive a home equity loan if you have at least a steady income. However, the higher your income, it brings your DTI to the lower level. This term would be an easy way for the loan company and you to make a deal about the second mortgage.

5. Reliable Payment History

As important as your sufficient income, the lenders also would evaluate your payment history for any loans and debt. For instance, if you are most of the time capable of paying your debt on time, it becomes the lender’s consideration. The loan company could ensure you qualify for a home equity loan. 

On the other hand, if you have such a bad history of loan payments, this is too risky for the lender itself. Many loan companies will decline your request for a home equity loan if it is too much risk. 

Can I Qualify for a Home Equity Loan?

Now, you can find the answer: can I qualify for a home equity loan? The answer is yes, you can. However, several factors become the main consideration for most loan companies to qualify you. Those factors include your monthly income, payment history, credit score, etc.

Those essential factors play a huge play in the approval of your home equity loan provided by the loan company. The lenders won’t take too much risk for you to receive your second mortgage. So, you have to make sure to improve those points to make an easy way to be qualified. Therefore, you will get the loan you need.