Home equity is a measure of the value of your home minus the amount you owe on your mortgage. For instance, if your home’s market value is $300,000 and your mortgage balance is $180,000, then your home equity is $120,000. This equity can be tapped through home equity loan or home equity line of credit (HELOC for short). You may be wondering how much of a home equity loan you can get approved for. . Here's what to know.
What is a Home Equity Loan?
A home equity loan allows you to turn the equity you have in your home into cash in one payment. You receive the money in full and then pay it back in equal installments over a certain period known as the repayment period, which ranges between 5 and 30 years. The amount takes into account how much equity you have, your income, credit score, the debt to income ratio etc.
What are the Determinants of Home Equity Loan Amounts?
Lenders consider several factors when deciding home equity loan amounts, including:Lenders consider several factors when deciding home equity loan amounts, including:
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Home Equity: Banks usually allow the borrower to receive up to 85% of the available home equity. This means that if you have $100,000 in equity, you can borrow up to $85,000 when going for a home equity loan.
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Loan-to-Value Ratio: Home equity loans usually allow borrowers only up to 90% or even 95% loan-to-value ratios. This means the first mortgage together with the home equity loan should not exceed 90-95% of the value of the home.
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Income and Credit Score: Employers use the applicant’s current debts and expenses to assess whether the additional loan repayments can be catered for. They will look into your credit score and report to assess your ability to repay the loan. Higher test scores lead to larger loans.
- Debt-to-Income Ratio: It is a new form of monthly payment that is added to the other monthly payments that you make to your lenders. It is common for most caps to limit the debt-to-income ratio to be between 36 and 50 percent. Smaller ratios mean that bigger loans can be made.
Understanding the Process of Preaproval for Home Equity Loan
The only way to estimate the home equity loan amount is to get prequalified or preapproved from a lender. Preapprovals involve a soft or hard credit check and income/debt documents view. But they provide you the right loan amount that you are eligible for and also the probable loan terms, including rate and payment. In preapproval, you do not spend a dime or agree to any terms that you do not wish to sign.
Lenders often set maximum loan to value ratio which limits the amount of home equity loans that can be granted.
But the question remains how much of a home equity loan you can actually get? Here are some general guidelines:Here are some general guidelines:
Excellent Credit (720+ score): This is usually in the form of; great credit, low debt and high income, may allow you to borrow up to 85% of the home’s value. Therefore, if you have $200,000 in home equity, you get up to $170,000.
Good Credit (680-719 score): Plan to borrow roughly 60 to 80 percent of your home equity with favorable credit. You may be given $90,000-$120,000 worth of credit for $150,000 of equity.
Fair/Average Credit (620-679 score): You can normally achieve 40-60% of your home equity with average credit scores. That means up to $60 000 on $150 000 equity.
Poor Credit (Below 620 score): One of the more significant challenges people face when trying to get approved is having a bad credit score. However, you can only get to enjoy 10-25% of the equity. However, if one has $100,000 equity, he or she cannot expect to earn more than $25,000.
Besides score requirements, most lenders require that after the home equity loan, at least 20% equity is maintained in case the home price drops.
Home Equity Loan Rate And Term Factors
The rate and term for your home equity loan also impact how much you can borrow:The rate and term for your home equity loan also impact how much you can borrow:
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Rates: Lower rates entail smaller payments you can afford. This means that, with each quarter percent rate drop, you can qualify for an additional 3-5 percent in terms of loan amounts.
- Term: For any given loan amount, long terms (such as 20 – 30 years) are less than short terms. Reduced payments enable you to be approved for more money.
Ways to Qualify for Home Equity Loan
If you want to maximize home equity loan amounts, consider these tips:If you want to maximize home equity loan amounts, consider these tips:
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Boost your credit score: Positive information, the payment history showing lower balance and credit utilization rate improve the score within short time. It is advised to wait until your score reaches its peak before applying for a job.
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Pay down high-rate debts: This helps in reducing the debt to income ratio which enable you to borrow larger amounts. Credit cards should be paid first.
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Save up bigger down payments: It implies that when you make a larger down payment on a particular purchase, you have more equity which is available in case you need it.
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Get preapproved early: Use preapprovals to shop and compare with several lenders. This displays to you precise loan costs that you will truthfully get approved for.
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Know your budget: Determine which home equity payment you can afford to make so you take a loan that you can manage to pay back.
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Wait if home values are dropping: Availability of home equity loan varies greatly depending on the value of homes and it decreases sharply when home values decline. Therefore, perhaps wait for downturns in price trends in your area before borrowing.
- Adjust terms to increase loan amounts: Taking longer terms, fixed rate or interest only periods can get higher approval amounts.
Home Equity Loan Alternatives
If you need to borrow a lump sum above home equity loan amounts for which you’d qualify, consider these alternatives:If you need to borrow a lump sum above home equity loan amounts for which you’d qualify, consider these alternatives:
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Home Equity Line of Credit – HELOCs are similar to credit cards that are secured by the equity of your home. You can access smaller sums when you need them instead of having to get a huge amount at once. It is easier to qualify for the bigger totals.
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Cash-Out Mortgage Refinance-A mortgage refinance is a process that involves taking a new mortgage in place of an existing one. The amount above your old loan balance is paid in cash to the borrower. Qualifying works like the primary mortgages.
- 401(k) or Retirement Plan Loans – loan is up to 50% of vested balance or $50,000 whichever is less. It will take about 5 years to pay ourselves back with lower costs on top of that, and instant approval.
Personal finance factors that determine the amount of home equity loan include the following. Having preapproved earlier in the process demonstrates exactly the amount you are likely to be approved for so that you decide better. Shop around to get the best deal from different lenders.
