How to Qualify for a Home Equity Loan
Operating as a revolving line of credit, a home equity loan (HELOC) allows homeowners to borrow money where their home services as collateral. This type of loans generally has a lower interest rates than credit cards that is beneficial to build credit ratings, pay off large debts, supplement costs for home projects and pay college tuitions or in some cases operate as an extra source of income. Additionally, home equity loans are tax-deductible and allow borrowers to take out up to 125 percent of the value of their home. However, this money isn’t just given away; the amount of equity you can borrow is contingent upon several factors.
• Property Appraisal: A lender will do an appraisal of your property to estimate its value. This also includes looking at the value of your home based on what you owe. If your home is worth one million and you only paid $200,000 off of your mortgage, lenders may not think you would be able to handle another loan payment. People can also lose their homes if they fail to make payments, so lenders will not offer someone a loan if they detect a shady credit history or a history of missed payments.
• Payment History: You will likely not be approved of a home equity loan if you purchased a house within the past year. Lenders want to see a history of your mortgage payments, including amount was paid and if they were on time or late. To get a good sense of a history, lenders look for borrowers who have made mortgage payments for at least two-three 2-3 years.
• Overall Income: This includes checking all of your bank accounts, paychecks, etc. Lenders want to see that you can make payments and what means you have to back this up.
• Credit Score and Credit History: Mortgage lenders look for good to excellent credit scores such as in the 700s. You can keep your credit in good standing by making regular payments and paying more than the requested minimum. Lenders also look at your expenses (car payments, other loans, etc) and past debts when establishing a line of credit.
• Additional Fees: Application fees, closing costs and taxes are all part of the home equity loan process. Some loans also have annual fees or maintenance fees, as well as (car payments, other loans, etc) and past debts when establishing a line of credit.