Requirements for Home Equity Loans In 2023
Tapping into the equity you have in your home is a popular way to borrow. Home equity loans have low-interest rates, the money you borrow can be used for many different things, and flexible repayment terms help with budgeting.
If you are thinking about applying for a home equity loan, the following overview of the requirements for 2023 can help you determine if you’re ready.
How Do Home Equity Loans Work?
Home equity loans are popular borrowing options for homeowners because they let you use the equity in your home as collateral. Because the loan is secured, you’ll have a lower interest rate than you would with other borrowing options.
Home equity loans are similar to personal loans in how they work. If you’re approved, you’ll receive a lump sum for the full amount upfront. The interest rate will be fixed, and you’ll repay it with equal monthly installments over a fixed term.
The amount that you can borrow with a home equity loan varies, although many lenders will let you borrow up to 85% of your home equity.
Terms for home equity loans are usually 5-20 years. It will vary depending on the amount borrowed, the lender, and other factors.
It’s important to keep in mind that if you sell your home, you’ll be required to repay the remaining balance of your home equity loan right away. This is because the loan is no longer secured with collateral. The proceeds from the sale of your home can be used to repay the loan.
Home Equity Loan Requirements
The requirements to qualify for a home equity loan will vary depending on the lender. It’s important to keep in mind as you consider your options, however, that credit unions typically have lower rates and fees than banks. They also usually have more discretion in their loan decisions.
Credit Score
Your credit score is an important factor that a lender will consider when evaluating you for a home equity loan. A good credit score indicates that you were responsible for repaying your debts in the past. It tells lenders that you will most likely do the same with a new loan.
A minimum credit score of 620 is usually required to qualify for a home equity loan, although a score of 680 or higher is preferred. However, a lender may approve you for a loan with a lower score if certain requirements are met.
If you need to improve your credit score before applying for a loan, there are some things you can do. For one, make sure all of the information on your credit reports is accurate because errors are sometimes made in credit reporting.
If you find a mistake, it’s important to dispute it with the reporting bureau as soon as possible. The three credit reporting bureaus are Experian, Equifax, and TransUnion.
You may also be able to improve your score by using no more than 30% of your available credit at a time. If you have a $10,000 credit card limit, for example, and you currently have $4,000 charged to your card, you can pay off $1,000 to get below 30%. You may also be able to reduce the percentage of available credit you’re using by asking for a credit limit increase.
Home Equity
Your lender will want to make sure you have enough equity in your home to cover the loan amount. Home equity refers to the amount of your home that you own. If you buy a $300,000 home with a $50,000 down payment, for example, you’ll have $50,000 in home equity after the closing.
Home equity also increases from the monthly payments you make on your mortgage and when the value of your home appreciates. The minimum amount of equity required to qualify is typically 15% to 20% of the value of your home.
Current Debts
Before approving your loan application, your lender will review your current debts to make sure you aren’t overextended. If you have multiple debt payments each month, there’s a chance that adding a new loan could result in missed payments.
To evaluate your current debts, your lender will consider your debt-to-income (DTI) ratio. The DTI ratio represents the percentage of your monthly income that goes towards repaying your monthly debts. The lower your DTI ratio, the better.
Many lenders will approve you for a home equity loan with a DTI ratio of 43%, although some will prefer a lower amount. It will just depend on the lender’s preference.
If your DTI ratio is higher than 43%, you can reduce it by paying off some of your debts before applying for a new loan. You could start with the smallest debt, pay it off, and then move on to the next smallest debt for some quick wins.
Income
Your income will be evaluated to make sure you earn enough to repay the money you borrow. Your employment history will also be considered. Those with steady employment histories tend to be less risky borrowers.
There are several ways that your employment and income could be evaluated. A few documents you may have to provide include:
- W2 forms
- Tax returns
- Bank statements
- Letter from your employer
Home Equity Loans With Freedom Credit Union
If you’re thinking about tapping into the equity in your home, Freedom Credit Union offers a home equity loan with an interest rate that’s lower than what most banks offer.
Unlike many lenders that only let you borrow up to 85% of your home equity, we loan up to 110% and don’t add any application fees or closing costs on our home equity loans. Also, all loan decisions are made at the branch level. This means you don’t have to worry about the loan decision being made by someone far away who hasn’t even met you.
Click on the following link to learn more about our home equity loan. You may be closer than you think to get the money you need!
