Requirements For a Home Equity Loan and HELOC - This range of standards requires consumers to use their best judgment. Even if you do qualify, think carefully about how much debt to take on. When you borrow against your home’s equity, you’re putting your house on the line as collateral, which means the bank could take the house if you don’t make the loan payments on time.
Role of credit scores
Lending strategies vary, “so what one lender may consider a ‘good score,’ another may consider nonprime,” says Ethan Dornhelm, vice president of score and analytics at FICO. At Comerica, for example, the minimum FICO score for home equity borrowing is 680, McEwen says.
Depending on your lender, borrowers with prime FICO scores (from 740 to 799) and super-prime scores (800 and up) may drive a better bargain. But not always. While some lenders use formulas relying heavily on credit scores, others emphasize the big picture. Standard Bank, in Monroeville, Pennsylvania, looks at several factors, says CEO Timothy K. Zimmerman.
“If you have an 820 credit score and I have a 680, that doesn’t mean you are going to get a better rate. You might have an 820 score, but you might have a lot of credit outstanding,” Zimmerman says.
Borrowing is limited
Generally, you can borrow up to 80%, and sometimes 85%, of the property’s value, minus its mortgaged debt, says Ron Haynie, senior vice president of mortgage finance policy at Independent Community Bankers of America, a trade group of banks serving local communities.
Standard Bank’s Zimmerman says customers with exceptionally low DTIs can, on a case-by-case basis, sometimes borrow up to 89%.
In short, debt-to-income ratio is key. If your mortgage balance is $200,000 and your home is worth $325,000, your credit limit would be $60,000 if you borrow 80%.
Here’s the math:
$325,000 x 80% = $260,000. Then
$260,000 – $200,000 = $60,000 credit limit.
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