The process of securing a home purchase is a large financial decision, but the monetary planning does not end there. Navigating your financial situation after a home purchase may leave you feeling like there is not much money left to work with, but the reality is that your home itself can be used as a vehicle for further purchasing power. Your money does not need to be locked up in your real estate if you elect to utilize loan options for which your property is the collateral. One such option is the home equity loan, but in order to qualify, you will need to fulfill several criteria.
What Is The Difference Between A Home Equity Loan And Home Equity Line Of Credit?
If you have done any research into leveraging your home for more financial flexibility, you may have already encountered more than one such vehicle. The most common options are home equity lines of credit and home equity loans. These two financial vehicles may sound similar, but they operate differently. While a home equity line of credit works much like a credit card in which your available amount is based upon the amount of home you own, a home equity loan takes out a loan against the value of equity in your home and tasks you with repaying the balance monthly, like you would with any other loan. Both options can be advantageous in their own ways, and in general, you will need many of the same circumstances in order to qualify.
Qualifying Based Upon A Percentage Of Equity
One of the primary means of determining whether you will qualify for a home equity loan is evaluating how much equity you have in your home. Equity is the amount of the home that you own, or in other words, the amount of your mortgage loan that you have repaid. If your home is worth $150,000 and you have repaid $50,000, you have $50,000 of equity in your home. Some lenders will not allow you to take out a loan on your home’s equity until you have paid off at least a certain percentage—often approximately 20%—of the home’s value.
Evaluating Your Credit Worthiness
As with any other type of loan, your credit score does matter to some extent. Those who have a high score are more likely not only to be approved but to receive favorable terms, such as a low-interest rate. In the same vein, those with low or median credit scores may have a harder time securing approval; generally, those with a score less than 640 will face a greater challenge.
A Balanced Debt-To-Income Ratio
When a lender considers who to lend to, one consideration at play is how much other debt that person has. If a person has much more debt than their annual income, they may pose a risk to lenders in terms of the likelihood that they will successfully and consistently repay their loan. By bringing your debt down (or your income up), you can create a more favorable picture of your financial situation that makes approval more likely. With this comes the need to prove that your income will be sufficient to make the monthly repayment amounts.
A History Of Timely Payments
As additional proof that you are a party who is likely to be able to repay your loan without defaulting or missing payments, your lender will look at your history of payments on other types of debt. If you can prove that you have managed other debt in the past without missing payments, entering into forbearance, or defaulting, you are more likely to see a favorable result when applying for a home equity loan as well. However, if you have not previously made payments to a loan because you have not acquired debt in the past, this does not necessarily mean that you will be denied. Rather, the lender simply will not have this piece of information and may consider you to be a higher risk; the other categories can boost your chances if managed well.
Trust The Mortgage Professionals To Offer Comprehensive Guidance
If you are considering a home equity loan or home equity line of credit but are not sure how these options work or whether they are right for you, one of the best options is to discuss your situation with a real estate professional. The experts at Fairfax Mortgage Investments would be happy to help you understand how to qualify for a home equity loan. Reach out to schedule an appointment to discuss your situation and goals.