Why do so many U.S. homeowners choose to borrow against the equity in their homes? In fact, there are plenty of good reasons to draw out some of the cash value you have built up in your property. For many people, it's a smart way to finance a remodeling project that will increase the home's value, or to pay for emergency medical expenses.
But not everyone gets approved for home equity loans and home equity lines of credit (HELOCs). There are some rather clear-cut requirements that you'll have to meet before making one of these types of loans. Here's a quick look at the difference between a traditional home equity loan and a HELOC, followed by the reasons for choosing to borrow, and finally the credit/income requirements that most borrowers face.
Here's a quick look at the difference between a traditional home equity loan and a HELOC, followed by the reasons for choosing to borrow, and finally the credit/income requirements that most borrowers face.
In general, it’s a bit easier to obtain a HELOC than a traditional home equity loan or original mortgage. Because the HELOC does not deliver a lump-sum of cash to the borrower, the risk is much lower for lenders. In addition to the fact that there’s no lump-sum payout, lenders are protected by the variable interest rate, the equity in the home, and the fact that many borrowers don’t opt for the allowed cash limit of the loan. For either loan, lenders like to see a credit score of 620 or better.
Income and Employment Stability
Even for homeowners who are employed full-time, lenders like to see long-term work history and income high enough to be able to make regular loan payments. Debt-to-income ratios should be around 43 percent, but can be a bit higher for HELOC applicants.
For either type of loan, borrowers should have at least 15 percent equity in their property, but 20 percent is a common rule-of-thumb requirement with many lenders. HELOC applicants can get by with a bit less equity than people who are seeking home equity loans, in most cases.
In the several areas that lenders consider, the HELOC applicant will tend to face a lower requirement than the home equity loan applicants. But in general, the 620-credit score, combines with 15-20% in your home, stable employment, sufficient income and debt-to-income rations of 43 to 50 percent are the cutoff points for a large number of lenders.
Why Borrow Against Your Home's Equity?
If you encounter large, unexpected expenses, borrowing against your home might be the only way to deal with the demand. It’s also a much smarter, lower-interest way of doing so compared to credit cards and traditional personal loans. Unexpected medical expenses and college tuition payments are two of the common reasons people turn to borrowing against their home. As long as the reason is not considered a “luxury” or unnecessary expense, borrowing can be a smart financial move.
Many homeowners use HELOCs and home equity loans to make major improvements to the property. If the remodeling job boosts the value of the home, these loans can be an ideal way to use low-interest financing to increase your total asset value.