As a homeowner, you will likely be faced with an expensive repair to your home or another large and important purchase in your life that you need some financial assistance in order to fund. For many people, these moments can be frustrating; if only they still had some of the money that they had funneled into their mortgage payments over the years!
The good news is that there are options available to allow you to use the value of your home itself as a financial tool to cover the cost of expenses, either to repair your home or to tackle other costs in your life. One such option is a home equity loan. In order to secure this type of loan, you will need to fulfill numerous requirements to qualify.
What Is A Home Equity Loan?
A home equity loan is a type of loan that is based upon the value of your home that you own. In other words, your equity, or the amount that you have contributed toward the ownership of your home, is the basis on which your home equity loan’s value is based. If you took out a mortgage for $150,000 on your home and have paid the mortgage down to $100,000, you have $50,000 of equity.
A home equity loan can use this $50,000 to offer you a loan against your own property. Borrowing against your equity provides a loan as a lump sum that is available immediately and must be repaid within a certain term, like a standard loan.
Is It Different Than A HELOC?
A HELOC, or home equity line of credit, is different from a home equity loan. Where a home equity loan is a way to acquire a lump sum right away, home equity lines of credit work more like credit cards. You are given a limit for maximum spending, and you may spend as much or as little of that total amount as you would like. Then, each month, you repay what you spend and bring the balance back down to zero or accept interest charges on what remains, just like a credit card. In this way, a home equity loan provides for more immediate (and often larger) sums.
How To Qualify For A Home Equity Loan
Qualifying for a home equity loan requires more than simply having equity in your house, though this is also an important facet; if you do not have enough equity, you may not be eligible for a home equity loan. Most lenders require at least 20% equity in order to qualify, even if you do not receive that much as a loan.
In addition to your equity, you will also need a low debt-to-income ratio. This means that your monthly debt obligations do not exceed a certain percentage of your income; exactly how much will vary depending on the lender you are receiving the home equity loan from. Manage your debt to income ratio by paying off credit cards and other loans or increasing your income. Generally, a ratio of 43% or lower is ideal.
Generally, you must also have a good credit score in order to qualify for a home equity loan. While the exact requirements will once again differ depending on your lender, most often a score in the mid 600s is sufficient, and you may be able to secure better terms such as a lower interest rate if your score is even higher.
Lenders will also consider your overall income. This is to ensure that you have the means to actually repay the loan. Not all lenders will consider this element, but it is wise to be able to show that you are able to fulfill your financial obligations.
Similarly, being able to provide evidence of a consistent payment history will work in your favor. Missing payments in the past on other obligations can have a negative impact on your approval for a home equity loan.
Trust The Experts To Help You Understand Your Options
Whether you are considering how to leverage your home’s equity using a home equity loan or a home equity line of credit and do not know which one is right for you, or you are ready to lock in a home equity loan and would like to get started with a lender, be sure to rely on the experts. The professionals at Fairfax Mortgage Investments would be happy to help you understand your options and which choices may be right for you. Reach out to schedule an appointment or ask any questions that you may have.