A home equity loan allows you to borrow against the accumulated equity value in your home, then repay it over time with interest. This is effectively a type of second mortgage, because your home serves as collateral for the loan. Home equity loans can be used for a number of purposes, including debt consolidation, home improvements or repairs, or even college expenses.
Whether you're able to get approved can depend on several things, including your credit scores, debt load, and how much home equity you have. Knowing how to get a home equity loan, what's required, and how to boost your chances of obtaining one can help you decide if this borrowing option is right for you.
- A home equity loan allows eligible homeowners to borrow against their home equity.
- Home equity loans typically have fixed interest rates and set repayment terms.
- Qualification for a home equity loan can depend on credit history, income, debt, and how much equity is in the home, among other factors.
- Shopping around for a home equity lender can help you to find the best interest rates and loan terms.
Get More Equity in Your Home
Home equity represents the difference between what your home is currently worth and how much you owe on the mortgage. The amount of equity you have in your home can influence whether you're able to get a home equity loan and, if so, how much you're able to borrow.
Generally, the amount you can borrow is limited to 85% of the equity in your home or less. Lenders consider your loan-to-value (LTV) ratio to measure risk when approving home equity loans. Your loan-to-value ratio measures the appraised value of your home compared with the amount remaining on the mortgage.
If you don't have sufficient equity in your home to qualify for a home equity loan, there are two things you might be able to do to increase it.
Pay Down the Mortgage
Paying down the principal on your mortgage can increase your home's equity if the value stays the same or goes up. This assumes, however, that you have the money to pay extra toward the mortgage each month or to make a one-time lump-sum payment.
Raise the Home's Value
Making certain improvements to your home could increase its market value and, with it, your equity. For example, upgrading your kitchen, renovating the bathrooms or adding on a room could also make your home more valuable. Again, this option assumes you have extra money to pay for those improvements.
Online home-value estimator tools may offer less-accurate results than a comparative analysis conducted by a real estate agent or a professional appraisal.
Reduce Your Overall Debt
Your debt-to-income (DTI) ratio is another factor lenders consider when deciding whether to approve you for a home equity loan. DTI ratio represents the percentage of your income that goes toward debt repayment each month. That includes payments to:
- Credit cards
- Student loans
- Auto loans
- Personal loans
- Existing mortgage loans
Debt-to-income ratio is important because home equity lenders may set a cap on how much debt you can have. For example, you may not be able to get a home equity loan if your DTI is above 43%. That's because lenders want reassurance that you'll be able to meet all of your financial obligations, including repaying a home equity loan.
Here are some tips for paying off debt so you have a better chance of meeting home equity loan requirements.
Refinance if Possible
Refinancing means taking out a new loan to pay off an existing loan, typically at a lower interest rate. You may also refinance to get a different loan term. Refinancing debts could make them less expensive if you're able to reduce your interest rates. That could help you pay off your debts faster and improve your DTI ratio.
Try a 0% APR Balance Transfer
If you have high-interest credit card debt, a 0% APR balance transfer could help you to pay down the balances sooner. Credit card balance transfers involve moving debts from one card to another at a lower interest rate.
Keep in mind that the promotional rate won't last forever. Be sure you can pay the balance offer before the introductory rate expires to avoid interest charges.
Before applying for a balance transfer credit card, check to see what kind of balance transfer fee you might have to pay.
Consider Debt Consolidation
Debt consolidation also involves taking out a personal loan to pay off existing debts. But you may or may not get a better interest rate with a debt consolidation loan. Consolidating debts could, however, make debt repayment more manageable because you will only have one payment to make toward the loan.
Increase Your Income
Making more money could work in your favor if you're seeking a home equity loan. More income can send the signal to lenders that you're able to pay your bills, including a home equity loan. Increasing income also can help to improve your DTI ratio. Here are some different things you can do to make more money ahead of applying for a home equity loan.
Negotiate a Raise
You may be able to make more money at your current job by negotiating a raise. Whether your boss is willing to agree to a raise can depend on many things, including how long you've been with the company, your overall track record, and the company's budget.
If you're considering asking for a raise, prepare a strong case going in. The more you can demonstrate your value to the company with tangible results, such as increased revenue, the better your odds of getting a raise may be.
Increase Hours or Seek Part-Time Work
If you're paid hourly, you may be able to make more money by taking on more hours. Earning overtime or time and a half could give your paychecks a boost. If you're already working the maximum amount of hours allowed at your job, you could consider adding part-time job or weekend job also. Consider, however, whether the financial return associated with working extra hours is justified by the loss of some of your free time and possibly adequate sleep.
Start a Side Hustle
Side hustles are a flexible way to make money outside of your day job. There are a lot of side hustles you can do online or offline, using the skills you already have. For example, you might be able to make money by:
- Delivering food or groceries
- Doing yardwork
- Taking surveys
- Starting a podcast or blog
Taking stock of your skills and interests can help you brainstorm profitable side-hustle ideas.
Side-hustle income is not tax-free; you'll need to report your earnings on your taxes when you file.
Improve Your Credit Score
A good credit score can also help when you're trying to get a home equity loan. A higher credit score tells lenders you're responsible when it comes to managing credit and debt. The minimum credit score required to get a home equity loan can vary by lender. In the meantime, you can focus on some specific things to raise your score.
Pay Bills on Time
Payment history accounts for 35% of your FICO credit score, making it the single most important factor influencing your score. Paying bills on time can help your score, while paying late can damage it.
Set up automatic payment reminders through your bank and credit card issuer so that you never miss a due date.
Pay Down Debt
After payment history, credit utilization, or amounts owed, is the second most important factor affecting your credit scores. Credit utilization means the percentage of your available credit you're using at any given time. Lowering this ratio by paying down debt or raising your credit limits could help to raise your credit scores.
Limit How Often You Apply for Credit
Hard credit inquiries can show up on your credit reports and trim points off your credit score. A hard inquiry means someone has pulled a copy of your credit file. Holding off applying for new credit cards or loans ahead of seeking a home equity loan can help you avoid losing points.
Dispute Credit-Report Errors
Inaccurate information on your credit reports also can negatively affect your credit scores. You have the right to review your credit reports and dispute any negative information you find. Equifax, Experian, and TransUnion all allow you to dispute credit-reporting errors online. If it's determined that an error exists, it has to be corrected or removed from your credit reports, which could add points to your score.
How To Get a Home Equity Loan
Getting a home equity loan isn't that different from getting a first mortgage or home equity line of credit (HELOC). Before you apply, consider checking your credit to get an idea of what rates you might qualify for and how much debt you're carrying. Look at your income and how much of that is going to debt. Finally, shop around among home equity lenders to find the best rates and loan terms.
Frequently Asked Questions (FAQs)
How long does it take to get a home equity loan?
The amount of time it takes to get a home equity loan can vary, depending on how long it takes the lender to approve you and underwrite the loan. Generally, you may want to plan for it to take anywhere from 30 to 60 days to get a home equity loan.
My house is paid off and there is no mortgage. Can I get a home equity loan?
You can still get a home equity loan even if your home is paid off. Lenders still will consider your credit scores, income, and DTI ratio when deciding whether to approve you.
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