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If you’re a homeowner looking to earn some extra cash without selling your house, a home equity loan might just be the answer.
Whether it’s to fund home improvements, pay off high-interest debt, or cover major life expenses, this type of loan allows you to use the value that you’ve built up in your own property.
But before you rush to apply, it’s important to understand that home equity loans have some requirements that you need to meet. Let’s break them down.
You Need to Have Equity
The first (and most obvious) one of the home equity loan requirements is that you need home equity.
Home equity is the portion of your home that you actually own, not the part that the bank still has ownership over.
Most lenders require you to have at least 15% to 20% equity before they’ll even consider giving you a loan.
To calculate your equity, take the current market value of your home and subtract whatever you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, you’ve got $100,00 in equity – or 33% equity.
A High Credit Score
Even though a home equity loan is secured by your house, lenders won’t just hand out cash because, say, you’ve got a nice porch. They still want to know you’re good for it, which is where your credit score comes in.
A credit score of 620 or higher is usually the minimum. But if you want better rates and terms, aim for at least a 700+ credit score.
Higher credit means lower risks, which makes lenders happy.
Stable Income and Low Debt-to-Income Ratio
Lenders like to see proof that you can actually afford to repay the loan before giving it to you. So, expect to show your income documents like pay stubs, tax returns, or bank statements.
They may also look at your debt-to-income ratio (DTI), which shows how much of your income goes toward debt payments every month. Most lenders prefer a DTI below 43% – but the lower, the better.
If your current debts (credit cards, car loans, student loans, etc.) are eating up most of your paycheck, your loan application might not make the cut.
Home Appraisal
Before you get approved, your lender will ask for a home appraisal to determine how much your house is worth in today’s market.
This helps them figure out how much they’re willing to lend you and keeps both of you safe from borrowing too much.
Appraisals aren’t free, by the way. You might have to pay $300 to $500 out of pocket for this step. But hey, better to know where your equity stands than to guess wrong.
You Need the Right Paperwork
Documents are a big part of the process. Be ready to gather:
- Proof of income
- Mortgage statements
- Property tax information
- Homeowners insurance
- A list of current debts
It’s like building a case to show lenders that you’re a responsible borrower.