To get a home equity loan, you’ll need to qualify, which means your lender will examine your equity, debt-to-income ratio and credit score. So, if you’re weak in one area, the other two can help boost your qualifications. To determine whether you qualify and how much money you can borrow, a lender will have your home appraised. The home appraisal will tell the lender how much your home is worth. Rocket Mortgage will allow you to borrow up to 90% of your home’s value (with qualifying credit). To figure out the amount you could obtain through a home equity loan, you’d determine your loan-to-value ratio (LTV). To do this, subtract the remaining balance of your primary mortgage from 90% of the appraised value of your home. For example, if your home is appraised at $400,000 and the remaining balance of your mortgage is $100,000, here’s how you’d calculate the potential home equity loan amount:Step 1: Get Your Home Appraised
- $400,000 x 0.9 (90%) = $360,000
- $360,000 – $100,000 = $260,000
This means you could secure up to $260,000 if you obtained a home equity loan.
Step 2: Calculate Your Debt-To-Income Ratio
When deciding whether to provide you with the loan, your lender will calculate your debt-to-income ratio (DTI), which shows how your monthly debt payments compare to your monthly income. This calculation helps lenders determine whether you can afford to take on more debt.
To qualify for our Home Equity Loan, your DTI can’t be higher than 50%. To see if you make the cut, you can figure out your DTI using the following equation:
DTI = Total Monthly Debt Payments ∕ Gross Monthly Income
- Add up all your monthly debt payments, including your primary mortgage, student loans, car loan, minimum credit card payment, alimony and child support.
- Divide the sum by your gross monthly income, which is the amount of money you earn each month before taxes and deductions.
- Multiply the result by 100 to find the percentage.
For example, if your total monthly debt is $1,500 (let’s say $950 for your primary mortgage + $300 for your car loan + $250 for your credit card debt), and you earn $5,000 a month before taxes, your DTI would be 30%. In this scenario, your DTI would be low enough to qualify for a home equity loan.
Step 3: Check Your Credit Score
The strength of your credit score also plays a role in determining whether you qualify for a home equity loan. Your credit score is important because it helps lenders understand your credit history. Individuals with higher credit scores often benefit from lower interest rates.
The minimum credit score needed for a home equity loan is generally around 620, but this is lender-dependent. Some lenders might prefer your score be closer to 680. If you want to obtain a home equity loan, a higher credit score will give you more flexibility on terms. For example, higher scores may allow you to access more of your equity.
At Rocket Mortgage, a 680 credit score means you're limited to accessing up to 80% of the equity you have in your home. If your FICO® Score is a median of 700 or better, you can access up to 85%. Finally, you can borrow up to 90% of your home’s value if your score is 740 or higher.
Remember that these LTV amounts combine both your primary mortgage and your new home equity loan. For example, if you have 45% LTV on your primary mortgage, you can only borrow a further 45% of your home’s value for a total of 90%.
Getting A Home Equity Loan With Bad Credit
Those who have had past credit issues know that it tends to be easier and less costly to obtain a home equity loan than a personal loan. Because home equity loans are secured by your home, they’re less risky for lenders. On the other hand, if you’re unable to keep up with your monthly payments, the lender can foreclose on your home to recoup costs.
If you’ve built up a fair amount of equity in your home and have a low DTI, your chances of obtaining a home equity loan will be higher despite a low credit score. If you find yourself in this situation, your home equity loan will likely come with higher interest rates and fees.
If your finances demonstrate to lenders that you may be unable to repay the money borrowed, you’ll find it more challenging to obtain a home equity loan.
