Want Another Way To Leverage Your Home Equity
If youre not sure you qualify for a home equity loan or HELOC or are afraid your interest rate would be too high a cash-out refinance is another option to explore. These have slightly less stringent requirements and generally come with lower interest rates than home equity loans or HELOCs, especially in the current market.
Another advantage is that a mortgage refinance replaces your existing loan, so youll only make one monthly payment and potentially lower your interest rate in the process.
If youre considering a cash-out refinance, be sure to look at as many lenders as possible. Credible makes finding the best deal easy you can see prequalified rates from our partner lenders in as little as three minutes.
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Requirements To Borrow From Home Equity
Home equity loans and HELOCs have their own sets of pros and cons, so consider your needs and how each option would fit your budget and lifestyle. Regardless of which type of loan you choose, home equity loan requirements and HELOC requirements are typically the same.
The requirements vary by lender, but you generally need:
- A certain percentage of equity in your home
- Reliable payment history
What Should Your Debt
In general, the lower the DTI ratio, the better. Many lenders require a DTI of 43% or below for a home equity loan. This ensures that you wont overextend your finances and end up owing more than you can pay. This helps create healthy debt and income habits.
If your DTI is higher than 43 percent, it might be best to work on reducing it before you try to acquire a HEL. You can lower your DTI in a few ways, the easiest of which is paying down debts, such as credit cards, and reducing or eliminating additional monthly debts.
Your DTI looks at monthly payments, not your total amount of debt, so one solution may be to prioritize the reduction of debt by focusing on the highest monthly payments first. Paying down debt that doesnt change its monthly amount based on the total owed doesnt help in the short term, but it is a great part of a long-term strategy for reducing debt and making the most of your home and its value.
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Chip Reverse Mortgage Vs Heloc
Now you know the answer to what is a HELOC, its time to consider if a HELOC is a viable option for retired homeowners.
Many retired homeowners may not qualify for a HELOC if they dont have sufficient income to make monthly payments. In addition, retirees may run the risk of losing their home if the bank sees them as a credit risk.
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Alternatives To Home Equity Loans And Helocs
If the idea of using your house as collateral for a loan doesnt appeal to you, there are other ways to achieve your financial goals. Here are some other options:
- Cash-out refinance: A cash-out refinance is when you refinance your primary mortgage for more than you owe and receive the difference in a lump sum. If you are eligible for lower rates with a cash-out finance plan, it can be a great idea, says Akhil Kumar, vice president and CCO of Arch Global Advisors, a financial advisory firm. Now that rates have risen above their historically low rates of the past two years, that might not make as much sense.
- Balance transfer credit card: If you have good credit, you could qualify for a 0% APR balance transfer card. It offers you the ability to transfer over any debt to a 0% interest card, sometimes for 18 months. This gives you the ability to make a big purchase and pay it off over time with zero interest. Just be sure to pay it off by the end of the promotional period or youll pay interest on the remaining balance.
- : If you have trouble staying on budget and paying your debt, or if youve got a financial goal youd like to build toward, you can contact a non-profit credit counseling agency to help. Youll receive education-based tools to help manage your money. It empowers you to take control of your own financial health and help you make better decisions in the future. Find a credit counselor by searching the U.S. Trustee Program database here.
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What Is The Debt
The debt-to-income ratio directly factors into whether a lender will approve your mortgage loan application or not. When buying your first home, your DTI is calculated with the estimated payments, taxes, and fees from the purchase. Depending on your credit score, savings, and down payment, lenders may accept higher ratios.
Lender limits can vary considerably, depending on the type of loan and overall financial profile of a prospective applicant, but there are guidelines in place that can serve as a frame of reference.
Since the Federal National Mortgage Association raised their DTI limit in 2007, the maximum limit for most lenders will not exceed 50%.
Prospective borrowers should strive for a DTI of at least 43%, or the maximum allowed to access Qualified Mortgage loans. These loans comply with federal guidelines that were created to prevent high-risk transactions between lenders and borrowers.
For some examples of what this looks like in real life, lets look at some lenders:
Loans guaranteed by the Federal Government have their own set of limits, as well:
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How Do I Calculate My Debt
The ratio is calculated by adding up your recurring monthly debt payments and dividing the total by your gross monthly income. Examples of debt payments used in the calculation include monthly payments for mortgages, auto loans, credit cards, student loans, child support, alimony and more. It does not include monthly expenses such as groceries, utilities and phone bills.Your gross monthly income is the total amount of money you earn each month before taxes and other deductions are withdrawn from your paycheck.For example, if your gross monthly income is $5,000/month, and you pay $1,200/month for your mortgage, $250/month for your auto loan and $300/month for your remaining debt, then your debt-to-income ratio is 35 percent. Its also important to note that the amount is based on your minimum required payments due, not the payments you actually make each month.
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Have A Reliable Payment History
When deciding whether to issue loans, lenders want to make sure that theyre not taking on too much risk. One of the main ways to do this is to evaluate potential borrowers payment history.
While payment history is folded into your overall credit score, lenders may look closer to see how often you pay your bills on time. If you have a history of late payments, lenders may be less willing to lend to you, even if you have an otherwise decent credit score. This is because they dont want to risk losing money in the event that you cant pay your bills.
This is especially true with home equity loans and HELOCs, since these are technically second mortgages meaning the lender will be second in line for payment should you fall into foreclosure.
Why its important: If you have a history of late payments or accounts in collections, lenders may be less willing to lend to you since they see you as a higher risk. Make at least minimum payments on credit card accounts or set up automatic payments before applying for a home equity loan to give yourself the best chances at approval.
Shopping For A Home Equity Loan Or Heloc
When you are shopping for a HELOC, youll want to make sure youre getting the best deal. Just like shopping for your original mortgage, it can pay to shop around and check out various lenders.
Because credit unions are not-for-profit and owned by their members, they generally offer the most competitive rates.To find out what Listerhill Credit Unions current rates are for HELOCs and Home Equity Loans, click on the following link.
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Have At Least 15 Percent To 20 Percent Equity In Your Home
Equity is the difference between how much you owe on your mortgage and the homes market value. Lenders use this number to calculate the loan-to-value ratio, or LTV, a factor that helps determine whether you qualify for a home equity loan.
To determine your LTV, divide your current loan balance by the appraised value of your home. For instance, if your loan balance is $150,000 and an appraiser values your home at $450,000, you would divide the balance by the appraisal and get 0.33, or 33 percent. This is your LTV ratio. Since your LTV ratio is 33 percent, you have 67 percent equity in your home.
This also determines how much you can borrow. You can usually borrow up to a combined loan-to-value ratio of 85 percent, meaning the sum of your mortgage and your desired loan can make up no more than 85 percent of your homes value. In the above example, 85 percent of the homes value is $382,500. If you subtract your mortgage balance, that leaves you with $232,500 of equity to borrow with a loan.
There are a few ways to build home equity:
- Pay your mortgage bill. Paying down your mortgage will increase the amount of equity you have in your home, and making more than the minimum payment will increase that equity even faster.
- Make home improvements. You can also work on renovations that increase the homes value although keep in mind that if you wait to make home renovations using a home equity loan, you could see tax benefits.
A Good To Excellent Credit Score
Your credit score is an essential determinant of your trustworthiness as a borrower. A good FICO credit score in other words, one approximately 670 and above is likely sufficient as long as you meet all of the other requirements.
If you have a very good credit score or an exceptional credit score , it indicates to lenders that you are very likely to be responsible with borrowed money and will likely pay it back on time.
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How To Lower Your Dti Ratio
There are several strategies to lower your DTI. The goal is not only to reduce overall debt but also how much youll pay on a monthly basis.
How Much Does Your Debt
Your DTI never directly affects your or . may know your income but they dont include it in their calculations. Your is still factored into your home loan application. However, borrowers with a high DTI ratio may have a high credit utilization ratio which accounts for 30 percent of your credit score. Lowering your credit utilization ratio will help boost your credit score and lower your DTI ratio because you are paying down more debt.
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What Is Included In Your Debt
Your DTI ratio should include all revolving and installment debts car loans, personal loans, student loans, mortgage loans, , and any other debt that shows up on a credit report. Certain financial obligations like child support and alimony should also be included.
Monthly expenses like rent, health insurance premiums, transportation costs, 401k or IRA contributions, and bills for utilities and services are generally not included. However, if you have long-overdue bills for these types of accounts, they might eventually be passed on to a collection agency. The debt may be included in the calculation if that is the case.
There are two types of DTI ratios that lenders look at when considering a mortgage application: front-end and back-end.
What is your front-end ratio?
The front-end-DTI ratio, also called the housing ratio, only looks at how much of an applicants gross income is spent on housing costs, including principal, interest, taxes and insurance.
What is your back-end ratio?
The back-end-DTI ratio considers what portion of your income is needed to cover your monthly debt obligations, including future mortgage payments and housing expenses. This is the number most lenders focus on, as it gives a broad picture of an applicants monthly spending and the relationship between income and overall debt.
A general rule would be to work towards a back-end ratio of 36% or lower, with a front-end ratio that does not exceed 28%.
What Happens If My Debt
If your debt-to-income ratio is higher than the widely accepted standard of 43%, your financial life can be affected in multiple waysnone of them positive:
- Less flexibility in your budget.If a significant portion of your income is going towards paying off debt, you have less left over to save, invest or spend.
- Limited eligibility for home loans. A debt-to-income ratio over 43% may prevent you from getting a Qualified Mortgage possibly limiting you to approval for home loans that are more restrictive or expensive.
- Less favorable terms when you borrow or seek credit. If you have a high debt-to-income ratio, you will be seen as a more risky borrowing prospect. When lenders approve loans or credit for risky borrowers, they may assign higher interest rates, steeper penalties for missed or late payments, and stricter terms.
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Is All Debt Treated The Same In My Debt
Ultimately, your total recurring debt influences your debt-to-income ratio and can improve or lower your chances of getting qualified for a mortgage. The ratio doesnt weigh the type of debt differently. The more debt you have, the higher your DTI and the harder it may be to qualify for a great loan.
Percent Intro Apr Credit Cards
When you use a 0 percent intro APR credit card, you can avoid paying interest on purchases during a promotional period that often lasts between 6 and 21 months. Using this option instead of a home equity loan can help you avoid interest charges altogether if you have a short-term home renovation project.
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Convert The Result To A Percentage
The resulting quotient will be a decimal. To see your DTI percentage, multiply that by 100. In this example, lets say that your monthly gross household income is $3,000. Divide $900 by $3,000 to get .30, then multiply that by 100 to get 30. This means your DTI is 30%.
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Have A Low Amount Of Debt
Your debt-to-income ratio is the amount you owe on monthly debt payments compared to your monthly income. Considering your DTI ratio helps lenders determine if you can reasonably manage taking on more debt. This ratio is key to whether you qualify for a loan.
To qualify for a HELOC, youll typically need a DTI ratio no higher than 43% to 50%though some lenders might require lower ratios than this.
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Add Up Your Minimum Monthly Payments
The only monthly payments you should include in your DTI calculation are those that are regular, required and recurring. Remember to use your minimum payments not the account balance or the amount you typically pay. For example, if you have a $10,000 student loan with a minimum monthly payment of $200, you should only include the $200 minimum payment when you calculate your DTI. Here are some examples of debts that are typically included in DTI:
- Your rent or monthly mortgage payment
- Any homeowners association fees that are paid monthly
- Auto loan payments
- Student loan minimum payment: $125
- Auto loan minimum payment: $175
In this case, youd add $500, $125, $100 and $175 for a total of $900 in minimum monthly payments.
Requirements For A Home Equity Line Of Credit
When you have equity in your home, you can use it to get cash to pay for things such as college, home improvements, putting in a fence, family vacations, braces, etc. You can also use the cash to consolidate high-interest debts. So, how do you get access to that money?
One way to get cash from the equity in your home is with a home equity line of credit also known as a HELOC. Read on to learn more about HELOCs and requirements for a home equity line of credit.
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