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If you’re looking to renovate your house, cover sudden expenses, or pay for your child’s college tuition, your home equity may be able to help.
With a home equity loan or Home Equity Line of Credit (HELOC), you can turn that equity into cash, using it to lighten your financial load or improve your property, among other things. Learn more about using a home equity loan or HELOC for your expenses below.
Requirements for tapping your home equity
- At least 15% equity in your home
- Debt-to-income ratio of around 43% or less
- Credit score in the mid-600s — or higher
- History of paying your bills on time
At least 15% equity in your home
When it comes to home equity loans and HELOCs, many lenders require you to have 15% equity in your home, though some may go higher. Wells Fargo, for example, requires at least 20%.
You won’t be able to tap all of that equity, though — no matter how much you have. Your lender will set your borrowing limit based on your loan-to-value ratio (how much you still owe on the home versus its market value.) Your LTV is basically the inverse of your equity, so the more equity you have, the lower your LTV will be.
Generally, lenders want to see a combined LTV of no more than 85%. To calculate your LTV — as well as your equity stake, you’ll first need your property value. You may need a home appraisal for this, which typically costs around $400.
For your equity, you’ll subtract the loan balance from your home’s value, and then divide that number by the home’s value. Here’s an example: In the above example, with a home value of $275,000 and a maximum LTV of 85%, your two loans would need to total $233,750 or less (275,000 x 0.85) for you to qualify. Credible makes finding great mortgage rates easy. You can compare prequalified rates from our partner lenders in the table below, all by filling out just one simple form. Your debt-to-income ratio (DTI) — or what percentage of your monthly income your debts take up — will also play a role. Typically, lenders require a DTI of 43% or lower. To calculate your DTI, add up your monthly expenses, including your mortgage payment, student loan payments, regular bills, child support, and other debt, and then divide that by your monthly income. Home equity loans offer less flexibility regarding DTI than HELOCs. In most cases, home equity loan borrowers must have a 43% DTI or lower to qualify. Some lenders are even more stringent, requiring DTIs as low as 36%. With HELOCs, lenders have more leeway. They may go as high as a 50% DTI in some cases. Keep Reading: HELOC vs. Home Equity Loan: How to Decide Exact credit score requirements vary by lender, but you generally need a score in the mid-to-high 600s to qualify for a home equity loan or HELOC. A high score (think 760 or above) typically makes for the easiest qualification process and gives you access to the lowest interest rates. If your score is in the low 600s or below, you may have trouble securing a home equity product, though it’s not impossible. If you’re less risky in other areas — you have a low LTV or DTI, for example — then you may still be able to qualify. Just be sure to shop around and consider a number of lenders if you fall into this low-score category. Learn More: Credit Score Needed to Refinance Your Home Lenders will also pull your credit report and evaluate your payment history. They want to see that you’re paying your bills consistently and on time (this indicates that you’ll likely do the same on your home equity loan). A history of spotty or late payments is a big red flag to a lender, even if your score is fairly high. Because of this, it’s important to stay on top of your bills — especially in the months leading up to your loan application. If you’re not sure you qualify for a home equity loan or HELOC — or are afraid your interest rate would be too high — a cash-out refinance is another option to explore. These have slightly less stringent requirements and generally come with lower interest rates than home equity loans or HELOCs, especially in the current market. Another advantage is that a mortgage refinance replaces your existing loan, so you’ll only make one monthly payment — and potentially lower your interest rate in the process. If you’re considering a cash-out refinance, be sure to look at as many lenders as possible. Credible makes finding the best deal easy — you can see prequalified rates from our partner lenders in as little as three minutes. Find My Loan Read more: Fixed-Rate HELOCs: A Cross Between HELOCs and Home Equity Loans
A debt-to-income ratio of around 43% or less
A credit score in the mid-600s — or higher
A history of paying your bills on time
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