A major benefit of being a homeowner is the ability to take advantage of home equity loans—borrowing against the equity of your home. If you’ve got big plans, whether to pay for an education, fund a home improvement project or something else special that requires significant funding, a home equity could be right for you.
That said, it’s been one of the most unusual years in recent history. Before making a major financial commitment, you should understand exactly what is needed in order to secure a home equity loan in 2021. To help you get started, we’ve outlined some of the key elements below. If you decide a home equity loan is right for you, check out Common Trust’s limited offer for 10- and 15-year Year Home Equity Loans.
In order to secure a home equity loan, you need to have enough equity in your home in the first place. At Common Trust, your loan-to-value (LTV) ratio can be approved for up to 80%. This means you’ll still have at least 20% equity in your home after taking out a home equity loan.
Here’s a simple equation for calculating the Home Equity Loan you’re eligible for:
[(Appraised Value of Home) – (Outstanding Balances)] × (LTV%) = Total Loan Value
The maximum total amount you’ll be eligible for is the total value of your home minus any outstanding balances.
In sum, before you get too far into the process, ask yourself these questions:
- How much equity do I currently have?
- How much money am I looking for in a home equity loan?
If you know the answer to those two questions, you can make sure that your goal for a loan is feasible.
Credit and Payment History
Naturally, when lenders are evaluating whether you are the right fit for a home equity loan, they’ll examine your credit and payment history. They look at the different credit accounts you have, like credit cards, ongoing student loans, and more. They’ll also review how much you’ve paid—and how much you owe. Most importantly, they’ll check to see whether your payments are on-time or if a portion of them are late. So make sure you’re regularly getting your payments in on time!
Most financial institutions require a credit score of at least 620. That said, your lender’s requirements could be higher, so make sure to check with them. Regardless, the higher your credit score, the more likely you are to qualify.
Many banks and credit unions look for credit scores in the mid 700s, so that’s a good target to shoot for. If your score isn’t quite that high, that’s okay too; it is still possible to qualify for a home equity loan with a less-than-perfect credit score. Check out our guide for more best practices for credit scores.
One of the key items a lender looks at when deciding whether to give you a loan is how you’ve managed other debts. They’re checking to make sure you can responsibly handle debt and that you’re not too weighed down with other loans and payments.
Your Debt-to-income (DTI) ratio is a measurement lenders use to determine this. Your DTI is the percent of your total gross monthly income that you use to repay your debt.
As a rule of thumb, most financial institutions require a DTI of 43% or lower in order to qualify for a home equity loan.
How to calculate your Debt-to-Income ratio:
- Add together all your current debts you pay off (car payments, student loans, credit card debt, etc.)
- Add to that total the expected monthly cost of your home equity loan.
- Divide that sum by your pre-tax income. The percentage you get is your DTI ratio.
Your DTI is critical for a home equity loan, so be sure to run those calculations to better understand what your options are.
Putting it All Together
To put yourself in the best position for a home equity loan in 2021, you’ll want to make sure you have a solid amount of equity in your home, a reliable credit and payment history, a high credit score, a relatively low debt-to-income ratio. As always, speaking with your financial institution is a great place to start when figuring all this out.
Special Offer: Limited Time Home Equity Loan Promotion
Think a Home Equity Loan could be right for you? It’s time to find out. Until March 31, 2021, Common Trust is offering our special 10- and 15-year Year Home Equity Loan promotion. With rates as low as 2.99*, you can get access to the funds you need and pursue the opportunity you’ve been waiting for. Take advantage of our low rates while you can. Check out the offer, and if you’re interested, get in touch! We’d love to speak with you and give you the information you need.
*Actual rate is subject to creditworthiness