A home equity loan is a type of loan that allows homeowners
to borrow against the equity in their homes. The loan sum is the difference
between the home's current market value and the value of any debts attached to
the home, usually a mortgage. Home equity loans come with a fixed interest rate
and are paid in monthly installments over a predetermined period.
To get a home equity loan, you need a good percentage of
equity in your home, a good credit score, your debt-to-income ratio (DTI) must
be low, you must have a steady and sufficient income, and you must have a good
payment history.
Some things are required of you as a borrower before getting
a home equity loan. The requirements vary depending on the lender, but the
basic needs are:
1. A good percentage of equity in your home: Equity is the
difference between how much you owe on your mortgage and the home's market
value. Having at least 15 percent equity in your home would be best before
getting a home equity loan.
2. A good credit score: This is important if you want a home equity loan and will secure more favourable interest rates. You can verify your credit rating on sites like Nav or Equifax. A credit score of 650 or higher will qualify you for a home equity loan with most lenders.
3. Your debt-to-income ratio (DTI) must be low: You should
have a debt-to-income ratio of 43 percent or lower. If you're above this ratio,
pay as much debt as possible before applying for a loan.
4. You must have a steady and sufficient income: Your income
determines how much you can borrow. An adequate income shows lenders that you
can make payments on your loan. In addition, the higher your income, the easier
your debt-to-income ratio will be.
5. You must have a good payment history: If you have a history of late payments, lenders won't want to lend to you, even if you have a decent credit score. The reason is that they don't want to risk losing money if you can't pay your bills.
Different types of home equity loans
1. Mortgages: A mortgage is another word for a secured home
equity loan. These loans come with the lowest interest rates which are usually
set at a fixed rate throughout the loan term. Funds are provided in one lump
sum at the start of the loan term. Typically, the amount of money you can
borrow is restricted to a proportion (often as high as 90%) of the value of
your house. But the borrower's income, credit history, and home's market value
are also considered.
2. Home equity line of credit: A home equity line of credit,
also known as a HELOC, acts similar to a credit card, where you can borrow
money on an as-needed basis and pay it back in full or in part each month. You
can draw up funds as many times as you want, and as much as you want up to your
approved credit limit.
3. Reverse mortgage: A reverse mortgage is a loan for
homeowners aged 60 and above. They have considerable home equity and can borrow
against the value of their home and receive funds as a lump sum, a set monthly
payment, or a line of credit.
Unlike a regular mortgage, a reverse mortgage doesn't
require the homeowner to make any loan payments. Instead, when the borrower
passes away, vacates the property permanently, or sells it, the whole loan sum
becomes due and payable. Typically the sale of the property is used to pay off
this loan. In addition, federal regulations require lenders to structure the
transaction so that the loan amount won't exceed the home's value.
The Benefits and Drawbacks of Home Equity Loans
- The ability to use the equity in their home to cover a variety of expenses: Home equity loan rates are usually a lot of money, and you can cover many expenses with them.
- Home equity loans can be a valuable tool for borrowers
struggling to pay off their debts: Because of the low-interest rate and ability
to consolidate your debts into one, easier to manage and cheaper loan, you can
pay off your debts much faster than you otherwise would be able to.
- Home equity loans can also be a helpful way to boost a
borrower's financial stability: With this loan, you can start a business or
invest the money that will make you financially stable.
- Home equity loans can provide a convenient and affordable
way for borrowers to finance their home improvements: Your home should be your
comfort zone, and getting a home equity loan makes it possible for you to make
it your dream space.
- Home equity loans can provide borrowers with a short-term
solution to long-term financial problems: With this loan, you can clear
multiple debts from various moneylenders.
Drawbacks
- Failure to pay the loan may cost you your home: If you
default on your home equity loan, your lender can initiate a foreclosure or
power of sale. These are legal procedures that give them the power to sell your
home to recuperate their loan from you.
- The loan may be difficult to qualify for and may require a
high credit score because most banks will not lend to borrowers with a credit
score under 650 out of 900.
- The loan may require a large down payment: The initial payment before getting the loan is usually high.
How to get a Home Equity Loan Without a Credit Check
- Find lenders who do not require credit checks: You should
opt for private lenders. They do not care about your credit score and history
when determining loan eligibility. They only need you to provide the market
value of your home and have a certain amount of home equity to get approved.
- Calculate your available equity: You can do this by
subtracting the amount you owe on your mortgage from the value of your home.
The remaining amount is your home equity.
- Compare loan options with different lenders: If you have a
good amount of equity available, you can now look for various loan options. A
mortgage broker can help you find lenders, compare them and find the best
deals.
- Select the best loan for your situation: After comparing
your loan options, ensure that a mortgage broker can help the borrower find and
compare different lenders to find the best one for their needs.
- Apply for the loan.
- Meet with the loan officer.
- Review the loan documents.
- Sign the loan documents.
- Enjoy your new home.
Tips on how to maximize the benefits of a home equity loan
- Understand the basics of a home equity loan: Before
getting a home equity loan, read up on it and educate yourself on the basics to
know what you are getting into.
- Compare home equity loans based on your specific needs:
Find out which home equity loan suits you and your financial needs.
- Get pre-approved for a home equity loan: Your lender must
check your employment history, debt-to-income (DTI) ratio, loan-to-value (LTV)
ratio, credit history, and income. This is an important step in the loan
process.
- Understand the terms and conditions of a home equity loan:
When you have chosen the loan option, it is best to read the terms and
conditions with a lawyer to know if they are what you want in a home equity
loan.
- Get started on your home equity loan by finding the right
lender: You need to find a good lender who will give you the best-fixed
interest rate with low risk.
- Monitor your home equity loan and take action if necessary:
After getting the loan, you must watch how it is spent so you don't affect your
credit score or increase your tax rates.
- Use your home equity loan wisely to improve your financial
situation: You can start by using the loan to pay off your credit card bills.
This way, you increase your credit score and improve your financial situation.
A home equity loan is a great way to get better financially
because it is a valuable tool to pay off your debts. It also offers you a
short-term solution to long-term financial problems. All you have to do is
reach out to a mortgage lender and get started today!
Jessica Coates is a blogger in Toronto. She graduated with
honors from the University of British Columbia with a dual degree in Business
Administration and Creative Writing. Jessica Coates is a community manager for
small businesses across Canada. When not working, she leisurely studies
economics, history, law and business solutions.
