One of the smartest ways to fund financial projects is to use home equity if you’re a homeowner. You can convert your home equity into accessible cash to pay for debt consolidation, home improvement, or other large expenses by applying for a HELOC or a home equity loan. Below are what you may need to borrow from your home equity in 2021.
Requirements to Borrow Against Home Equity in 2021
Both HELOCs and home equity loans got their own set of advantages and disadvantages that you should consider to see which would be a better fit for your financial needs, your budget, and your lifestyle. With this said, their requirements are nearly the same although there will be slight variations by lender. Generally speaking, you will need a reliable payment history, sufficient income to cover what you will borrow, good credit, a good amount of equity in your home, and a low debt-to-income ratio.
A Reliable Payment History
A reliable payment history tells lenders that a borrower has a lower chance of defaulting compared to other people. Lenders may look at how often bills are paid on time and not just focus on the credit score. Late payments and a history of non-payment will make it quite difficult to borrow.
Have Sufficient Income
Not all lenders will have specific income requirements to qualify for a certain loan but most will take your income into consideration when evaluating your application. You can improve your chances of getting loan approval by boosting your income a year or at least half a year before applying for a HELOC or home equity loan. Make sure that you can verify your income too.
Attractive Credit Score of About 600 or Better
Above 700 will be the best number but there are instances wherein scores of 621 to 699 breezed through application as well. It is possible to qualify with a lower score but that usually requires a higher income and more home equity. Note that the higher your credit score, the more negotiating power you may have for the interest rate charged to you.
Home Equity of Around 15% to 20% if Not More
Your home equity is the percentage of the value you truly own in your home. It is the difference between your property’s current market value minus all existing debts you have on it. The higher your home equity is compared to the current market value of your home, the better your chances of getting approved for a HELOC or a home equity loan because lenders want to lend to someone with a better loan to value ratio.
Lower Than 43% Debt-to-Income Ratio
A low DTI or debt-to-income ratio is desired. This number varies from lender to lender, with some requiring that debt payments should be less than 36% of someone’s monthly income. Other lenders can tolerate as high as 50% but the sweet spot is around 43%. To estimate your DTI, you need to add up all your monthly debt payments and divide the sum by your gross monthly income. If you find that your DTI is too high, you can improve that by paying off as much debt as you can with a focus on debts that charge the highest interest rates.
Should You Get A Home Equity Loan or A HELOC in 2021?
You may qualify for both, but one will be better than the other. If you are not sure what to use, contact us and we will answer any questions that you may have so that you can make a better-informed decision to access your home equity in 2021.