What do I need to qualify for a Home Equity Loan? Here are the requirements.

If you are a homeowner who has paid off your mortgage chunk or the home has acquired value, you may be able to retrieve a loan protected by the capital of your home. However, having stock in your home is not the only requirement to qualify for a home equity loan.

Here are some things you need to know about home equity loan requirements: Understanding the rules of thumb will help you determine whether your home equity loan is right for you and prepare accordingly.

learn more: What is a Home Equity Loan? Complete overview

In this article:

Home Equity explains the difference between your home’s value and your excellent mortgage balance. For example, if your home is worth $400,000 and you still owe $300,000, you still owe 75%. That means there is 25% stake.

A home equity loan is a type of second mortgage that you can borrow from the stocks you have built. It’s a safe loan so I’ll use your home as collateral.

Home equity loans usually have a fixed interest rate, and the proceeds from the loan are spent as a lump sum. To repay your home equity loan, you can make a regular monthly payment that is amortized during the repayment period. This can take up to 30 years.

Stocks are calculated by subtracting the balance of your mortgage from the market value, so the amount you can access through a home equity loan depends in part on the market value of your home.

You’re deeper: How much is your home worth? How to determine the value of your home.

Borrowers must meet several important lending criteria to qualify for a home equity loan. Although certain requirements vary by mortgage lender, these are the typical criteria you need to meet to qualify for a home equity loan.

Most lenders offer housing equity loans only to homeowners with at least 15% to 20% of stock. For example, let’s say your home is currently worth $400,000 and you’re borrowing $350,000 on a mortgage. Most lenders are unable to take a home equity loan as they only earn $50,000 stake, which is 12.5%.

Homeowners with $400,000 worth of homes need at least $60,000 to $80,000 in stock to reach the minimum 15% to 20% that most lenders require.

Also, most lenders will not allow you to borrow more than 80% of the shares you have built in your home. So, if you have $80,000 worth of stock in your home, your lender will usually keep your home equity loan at $64,000, or 80% of your $80,000 shares.

read more: 7 Ways to Building Equality in Your Home

Good credit and low debt to income ratio

The lender should trust you to pay back your home equity loan. Therefore, we set a minimum credit score and maximum debt-to-income ratio to qualify for this type of second mortgage.

Credit requirements for home-based equity loans vary by lender, but the typical minimum credit score required is 680. However, a higher credit score can help you qualify for lower interest rates and better terms.

The Debt-to-Income Ratio (DTI) calculates how much of your monthly income will be to pay your forced debt. Lenders typically prefer a DTI ratio of less than 43%, but some require a slightly lower or higher ratio. A lower DTI ratio to have a higher credit score means you are more likely to qualify for better housing stock loan fees and terms.

learn more: What is the ratio of debt to income? Also, how do you calculate it?

To qualify for a home equity loan, you will need to check your income. A mortgage lender must prove that you can afford to pay for your home equity loan. You may need to provide a pay stub, W-2, or tax return to prove your income level.

You’re deeper: What percentage of your income should be directed to a mortgage?

Homeowner insurance doesn’t just protect you from unexpected losses. It also protects your lender in case something happens to your home. This is why mortgage lenders require homeowners to carry appropriate insurance as a loan term.

The same applies to Home Equity Loans. To qualify for a home equity loan, you must provide proof of your current homeowner insurance. Your insurance protects lenders’ investments in your home in the event of a disaster.

read more: What does homeowner insurance cover?

Home equity loans typically require an assessment to determine the current market value of your home. A home valuation ensures that mortgage lenders know exactly how much stock you have in your home. This way, lenders can protect themselves from lending money to borrowers.

Continue learning: How Home Evaluation Works

Starting a home equity loan application will make the process easier before you create the required documentation and information. Most borrowers need these documents to apply for a home equity loan.

• Your latest mortgage statement: This document shows the remaining balances for your major mortgages.

• Proof of income: This may include your latest tax returns, W-2, and pay stubs. Employment proof is also required.

• Bank Statement: Mortgage lenders may wish this information to determine your cash reserves before you take on more debts.

• Insurance Documents: Lenders require a copy of the homeowner’s insurance policy and risk or flood policy.

• identification: Keep your Social Security number, driver’s license or passport on hand.

The lender will also need to look at the ratings of your home, but the lender will usually order the rating after applying for a loan and receiving pre-approval.

read more: How to Choose a Second Mortgage and Refinance

Home equity loan lenders can reject applications for a variety of reasons. The lender may turn down a landlord who is not fair, even if he is otherwise qualified. However, having enough equity in your home does not guarantee a loan. If your credit history is poor, if you have a high debt-to-income ratio, or you cannot prove that you have enough income to pay off your loan, the lender will be your You may refuse your home equity loan application.

Usually yes – most lenders need a home equity loan rating to assess how valuable your home is. Evaluation ensures that neither lenders nor borrowers use inflated value to identify levels of equity.

Yes, the term “Second Mortgage” refers to a new loan that you use as collateral to photograph if your home already has the first mortgage that you already have protected. In other words, Home Equity Loans and Home Equity Credit Line (HELOCS) are both the second type of mortgage.

This article has been edited Laura Grace Tarpley.