One of the best things about homeownership is that you’re working toward accumulating money. As long as housing prices remain strong, each payment will get you a little closer to selling your home at a profit someday. You can take a loan against that money once you’ve accumulated enough equity, but you’ll be limited to borrowing only a certain percentage, based on your debt-to-income ratio.
TL;DR (Too Long; Didn't Read)
In most cases, you can only borrow up to 80 percent of the value of your property minus what you still owe on it, but you’ll have to qualify.
Home Equity Loan Requirements
There are two major types of loans homeowners can take against the equity in a home. With one, there’s a mortgage borrowed of a fixed amount, which is issued to the homeowner to later repay. With the other, you’ll get a fixed line of credit that you can draw on as needed. Although it’s much rarer, some homeowners opt for a cash-out refinance, which has them refinancing their loan and taking the savings they get from doing so in cash.
The home equity loan requirements vary dramatically from one to another, so it’s important to research them before you reach out to your lender. Your credit score and debt-to-income ratio will both factor into whether you’ll qualify and how much you’ll be approved to borrow.
Requirements to Borrow Money
Whether you’re requesting a home equity loan or a line of credit, most mortgage borrowing will require you to meet certain criteria. One commonality among lenders will be the requirement that you have equity in your home before you can take a loan out against it. Typically, your equity will need to be at least 15 to 20 percent of the home’s current value, which will probably require an assessment from a professional appraiser.
As you’re running a mortgage qualification calculator to determine if you have enough equity, you should also check your debt-to-income ratio. Just as when you initially bought your home, you’ll need a specific number, which will at least be 43 percent but could go as high as 50 percent. Your credit score will likely also come into play, and it will probably need to be 620 or higher, in addition to you consistently paying your bills on time every month.
Amount You Can Borrow
If your request is approved, you’ll usually see a limit on how much you can borrow, which means you may need a mortgage qualification calculator to figure how much you’ll get. You’ll probably only be able to borrow up to 80 to 85 percent of your property’s value minus what you still owe on the mortgage. If you have an extremely low debt-to-income ratio, you may be able to borrow as much as 89 percent.
When you’re trying to take a loan against your mortgage, borrow limits are calculated based on something called loan-to-value equity. A home that appraises for $300,000 with a $200,000 mortgage balance has $100,000 in equity. But you must retain a minimum percentage of equity in the home when you take out a loan, which limits the amount you can borrow of that $100,000 significantly.
The Cash-Out Refinance Option
Those planning massive remodeling projects often rely on something called a cash-out refinance, which has you refinancing your home and taking some of your equity in cash. Before you choose this option, you’ll need to run a mortgage qualification calculator to ensure this is the best option. You will be refinancing your home and taking the equity in cash, so if interest rates have changed, you can end up with a higher-interest loan than you currently have. You’ll also have to pay closing costs again, often making this less appealing than home equity loans and lines of credit.
Like home equity loan requirements, you’ll need a solid credit score and a low debt-to-income ratio. However, you’ll also need to go through a qualifying process similar to what you went through when you initially bought your home. This means providing at least two years of tax returns and proof of income for the past two years.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.