Credit requirements for a home equity loan

You develop equity in your home by making your monthly mortgage payments. The amount between how much you owe on your mortgage as well as what your property is worth is known as equity, and one of the most valuable aspects of owning a home is the opportunity to borrow against it to cover bills such as repairs, college tuition, and other unexpected costs. Lenders have varied requirements for who qualifies, but we’ll go over some common home equity loan credit requirements in this post.

What Is the Definition Of A Home Equity Loan?

A calculator a pen and a demo plastic house placed on the top of a paper

A home equity loan also referred to as a second mortgage, is a loan secured by the equity in your home. The loan money will be given to you in one lump sum, and you’ll usually pay a set interest rate, which means your monthly payment won’t alter.

A home equity line of credit, or HELOC, is not the same thing. A HELOC gives you a set amount of money that you can use in several draws over time and pay off at a variable interest rate.

Where Do I Get A Home Equity Loan?

The amount you can obtain with a home equity loan is usually determined by the value of your home. You can typically borrow up to 85% of your home’s value, and the more equity you hold, the more you can borrow. You’ll get the money in one lump amount, and you’ll have to start paying it back right away with a monthly payment at a predetermined interest rate. You risk losing your home to foreclosure if you don’t pay your mortgage on your home equity loan.

Requirements For A Home Equity Loan

The conditions for a home equity loan vary by institution, but most lenders follow some fundamental guidelines. Examine your financial situation prior to actually applying for a home equity loan to discover if you qualify.

Your debt-to-income ratio compares your current monthly liabilities to your current monthly income. To figure out your debt-to-income ratio, add your monthly loan payments and divide them by your gross monthly compensation. For example, if you make a salary of $75,000 per year and have a $400 student loan payment, $300 car payment, and $1,800 mortgage, your debt-to-income ratio would be 40%.

Once your possible new loan payment is taken in, your debt-to-income ratio should be below 43 percent to qualify for a home equity loan. You can reduce your debt-to-income ratio in one of two ways: by paying down debt and lowering your monthly responsibilities or by increasing your income.

A home equity loan credit expert checking home equity loan requirements

In most circumstances, a credit score of 620 is required to qualify for a home equity loan, while in some cases, the ceiling might be as high as 660 or 680. Nevertheless, there still may be opportunities for negative credit home equity loans.

Request your credit scores from the three major credit bureaus to learn your credit score. You are entitled to free copies of your credit report under federal law, which you may obtain by visiting Your payment history is the most important aspect of your credit score, so if you need to improve your credit score in order to be eligible for a home equity loan, aim to make your payments every month on time.

The amount of money you may borrow with a home equity loan is restricted by your equity, but you must have a certain amount of equity to apply. For home equity loans, many lenders impose a loan-to-value restriction. The loan-to-value ratio is a measure of equity that compares the total amount of debt on a home to its value. If you owe $200,000 on your mortgage, however, your home is worth $250,000, your loan-to-value ratio is 80%, and your equity is 20%.

To qualify for a loan, you typically need at least 15% equity in your house (an 85 percent loan-to-value ratio); however, many lenders can go beyond this. Once the loan-to-value ratio exceeds 90%, the FDIC recommends that lenders require mortgage insurance or other additional protections.

Is A Home Equity Loan Right For Me?

If you want to receive a home equity loan, you should do the following.

Make renovations to your house. Home equity loans are frequently used to finance expensive home modifications such as repairs and extensions. The interest you pay on the loan is usually tax-deductible if you use it to improve your house.

A man reviewing home equity loan papers before signing them while other person handing him keys

Pay off debt with a higher interest rate. High-interest debt, such as credit card debt, is routinely consolidated with home equity loans. House equity loans often have lower interest rates than unsecured loans like credit cards or personal loans since they are secured by your home.

You might be able to consolidate these loans into your new home equity loan, resulting in a cheaper interest rate and monthly payment. Your mortgage and other monthly bills are within your means. If a second mortgage will break your budget, don’t acquire one. In addition to a mortgage payment and other types of loan payments you’ll still have to make, a home equity loan adds another monthly obligation to your budget.

Applying for a home equity loan when you’re not ready can have major consequences. Failing to make a monthly payment can put you in danger of foreclosure because these loans are secured by your home.

Reach Out For More Information

If you have any questions or concerns regarding credit requirements for a home equity loan, please don’t hesitate to reach out to our friendly, helpful staff of professionals at Fairfax Mortgage Investments for more details and information as to what options may be suitable for your personal needs.