Homeownership can prove important when you need some financial assistance. If you have built enough home equity, you can use your home as collateral for an equity loan. So, if you are looking to tap into your home's worth, a home equity loan is the way to go.
A home equity loan helps you get a good amount of cash to pay back at a fixed interest rate. You apply for a home equity loan if you want to finance a remodeling project, pay college tuition, or cover sudden expenses.
Unfortunately, home equity loans are not available to everyone. There are requirements that you must fulfill to qualify for a home equity loan.
A Good Credit Score
The term loans and credit score go hand in hand. Therefore, it is almost impossible to access a home equity loan with a low credit score. Financial institutions will always use your credit score to determine if you qualify for loans.
Your lender will need you to have a score in the mid 620 or higher. The higher your credit score, the easier it becomes to access a home equity loan. Besides, every home equity loan program relies on the credit score to set interest rates. If you have a good score, expect a low-interest rate.
Low Debt-to-Income Ratio
Lenders will refer to your DTI ratio when reviewing your home equity loan application. If your debt-to-income ratio is pretty high, the lender might reject your application. Most lenders want clients whose debt-to-income ratio is below 43%. That means your monthly debts should not eat more than 43% of your gross monthly income.
Before applying for a home equity loan, calculate your DTI ratio and see if it falls within the recommended range. If it doesn't, pay off as much debt as you can. That way, you'll have lowered the ratio significantly.
Loan Payment History
Financial institutions have to ensure they are not taking a high risk by giving you a loan. As such, they have to check your loan payment history to determine whether you pay your debts and bills on time. If your record shows that you are always late paying bills, potential lenders may view you as a high-risk client.
As such, they might be less willing to approve your home equity loan application. So, make sure that you have a reliable payment history before you think about applying for a home equity loan. Other requirements you should know are:
- A sufficient income
- A minimum of 15% to 20% equity in your home
For more information, contact local mortgage lenders.