Tapping home equity can be a smart way to borrow money to finance home improvement projects or to pay high-rate debt. If you have significant equity in your home because you have paid off your mortgage or the value of your home has increased, you may be able to get a large loan.
What it takes to borrow on the equity in your home in 2019
There are three ways to tap into your home equity: a net worth loan, a net line of credit, or a withdrawal refinance.
Each loan has its own advantages and disadvantages, so it’s important to consider your needs and how each option fits your budget and lifestyle.
See the net worth rates
Leverage the value you have at home to get the funds you need.
Before applying for a loan, you must:
- Have at least 15 to 20% equity in your home.
- Have a credit score of 620 or higher for a higher probability of approval.
- Have a debt-to-income ratio of less than 50%.
1. Have at least 15 to 20% equity in your home
Equity is the difference between what you owe and what your home is worth. Lenders use this number to calculate your loan-to-value ratio, or LTV, a factor used to determine if you qualify for a loan. To get your loan-to-value ratio, divide your current loan balance by the current appraised value.
Let’s say that the balance of your loan is 150 000 € and that your house is valued at 450 000 €. Divide the balance by the evaluation and get 0.33, or 33%. This is your LTV ratio.
Determining the value of your home requires an assessment. Your lender may ask a chartered appraiser to inspect your home.
For HELOCs, you need to determine your combined loan / value ratio, or CLTV. This is determined by adding the amount you want to borrow, in the form of a lump sum or line of credit, and the amount you owe.
For example, if you want $ 30,000 and you owe $ 150,000, then you have to add those numbers and divide them by the estimated value. If the house is valued at 450 000 €, the equation would look like this: (150 000 € + 30 000 €) / 450 000 € = 0.4 or 40%. Your CLTV is 40%.
Most lenders require a CLTV of 85% or less for a HELOC approval.
2. Check your credit score
Having equity is not enough to get a loan from most banks. A favorable credit score is also essential.
Alex Shekhtman, a mortgage broker at LBC Mortgage in Los Angeles, said the banks were still exhausted by the 2008 real estate crash.
“If you do not have good credit or if you already owe a lot, it will be harder to get a loan from a big bank,” says Shekhtman. “The banks lost a lot of money during the recession and now they are paying much more attention to who they lend to.”
A credit score greater than 700 may qualify you for a loan, provided you meet the criteria for fairness. Owners with credit ratings of 621 to 699 could be approved, but most likely at higher interest rates. Those with scores below 620 may still be able to claim a net worth loan, but lenders may require the borrower to have more equity and be less indebted to their income.
You can get your credit report and score for free on Bankrate. Some credit card companies and some banks offer their cardholders free of charge. So be sure to check with your financial institution before paying your score.
Consumers are entitled to a free credit report each year from each of the three major credit reporting agencies: Experian, TransUnion and Equifax.
Examine your credit reports to make sure there are no errors. If you notice an error, such as late payment, report the problem to the credit bureau that displays the information. Your score will probably improve once the error is removed.
3. Have a debt-to-income ratio of less than 50%
Your debt-to-equity ratio, or DTI, is also a factor that lenders consider with home equity loan applicants. The lower the percentage, the better. The DTI qualification ratio varies from lender to lender, but most require that your monthly debts absorb less than 50% of your gross monthly income.
Lenders will add the total monthly payment for the home, which includes the principal of the mortgage, interest, taxes, homeowners insurance, direct liens and homeowners association dues, and any other debt outstanding which constitutes a legal liability.
The total amount of debt is divided by the gross monthly income of the borrower (base salary, commissions and premiums, as well as other sources of income, such as rental income and support), to obtain the DTI ratio.
You can improve your DTI by earning more money, reducing your debt, or both.
Before applying for a crowdfunding loan, make sure to calculate your DTI. If you are above the optimal ratio, repay your debts as much as possible. Get a part time job if you have to. First repay the loans at the highest interest rates. The money you save on interest can be used to pay other debts. If you do not know how to make the most of your extra money, look for debt and snowball debt repayment solutions; these offer simple instructions on the order in which to pay your debts.
Federal and state requirements for 2019 equity loans
All lenders must comply with national and federal rules when lending money. Although federal rules are the same everywhere, state rules can alter the opportunities available to lenders from one sector to another.
Banks usually only allow you to withdraw 85% of your equity. If your home is a rental or investment property, that number drops to 75%. One of the key federal rules that has changed in 2018 is the tax deductions you can get on the interest on your loan on net worth. From now on, only the interest on the purchases used to build or improve the house that you secure are deductible.
The biggest differences from one state to another are more about interest rate ceilings. High risk lenders can offer a high interest rate equity loan, although some states limit the maximum interest that can be charged.
Lenders are not all the same and the offers you will get will depend on the lender you work with. One factor could be your relationship with the bank. If you have money in the bank or if your main mortgage is in the bank, there is often a reduction in the interest rate for existing customers. The credit unions of which you are a member may also offer discounts on loans.