A List of Qualifications for a Home Equity Loan

A home equity loan allows you to tap into the asset base you have built up thus far in your mortgage. You will be able to use your home as collateral on a new loan. This new loan adds a second lien to your property. The second lien is subordinate to your senior loan, but it still works to place your home deed on the line.

Sufficient Equity in your Home

The primary factor that will determine how much of an equity loan you can achieve, if any, is how much equity you have built in your own home. You will typically be able to borrow only a portion of the amount you have already paid off; this is called the loan to value ratio. Since a home is not a very liquid asset, meaning it cannot easily be converted into cash if you default on the loan, the lender will allow you to take a smaller loan to value on the loan.

Most people take a home equity loan only after they have been in the property for a long time and are looking to invest more money into the home. The most common LTV ranges are between 55 to 75 percent of the home’s value. So, if your home is worth $100,000, you can be eligible for a loan of $55,000 to $75,000.

Stable Income

You must be able to demonstrate you have the ability meet both your monthly mortgage payment and the new home equity loan payments. This means your monthly income must be high enough to show you will consistently meet payments. Aside from simply having a high income, it is important your income is relatively stable. If you just started a new job or a new business, you may not qualify for a loan since there is not enough data over time about your earning potential. Most lenders typically look for a two year job history.

Good Credit History

Your performance on past loans will be a large factor on whether or not you can secure a new one. FICO scores are very important with this type of loan. Typical acceptable ranges are between 800 to 700. Generally, these loans are riskier type of loans so lenders require your score to be a little higher.

Risks of Home Equity Loans

Home equity loans are highly risky. If you default on your subordinate loan, the equity lender may purchase your primary mortgage and force you into foreclosure. This means you truly can lose your home through your secondary line even if your other mortgage is in good standing. Aside from this drastic risk, there are other much smaller but still substantial risks. Going into too much debt can leave you without enough assets if an unexpected emergency occurs. You should also aim to constantly build equity in your home to provide for your long-term net worth.

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