Home Loan Requirements | Guidelines for 2022


Who Eligible for a Home Loan?

The most important requirement for a home loan is that you have enough equity to borrow. The good news is that most US homeowners have plenty of pent-up cash. According to CoreLogic, the average borrower gained $63,600 in home equity between 2021 and 2022 alone.

In addition to having sufficient equity, you must meet minimum credit requirements and have a stable income to qualify for a home equity loan. These requirements are flexible from lender to lender, and many homeowners may qualify.

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Typical home equity loan requirements

Most mortgages must conform to rules set by either Fannie Mae and Freddie Mac or a government agency. But that’s not the case with home equity loans. Each lender can set their own home loan requirements, and these can vary significantly from company to company.

Below are typical home equity loan requirements that you will likely see from many banks and lenders. Some may be more forgiving than others, but be aware that if your loan is borderline or deemed higher risk, you may pay higher interest and closing costs.

Minimum equity required to qualify

Most lenders want you to keep 20% of the value of your home as a financial cushion. This means that you can typically borrow up to 80% of the value of your home between your main and secondary mortgages together. In other words, you need more than 20% equity to qualify for a home equity loan.

Here is an example:

  • Her house is worth $400,000
  • Your existing mortgage balance is $200,000
  • Your maximum combined loan amount is $320,000 (80% of $400,000)
  • Your maximum home loan amount is $120,000 ($320,000 minus existing loan balance)

Remember that your total equity is the difference between your home value and your primary loan amount. Even if you technically have $200,000 in home equity in this scenario, you can’t borrow the full amount because you must leave that 20 percent equity cushion untouched. So your maximum home loan amount is closer to $120,000.

You may find lenders who will lend you more than 80% of your equity. But they’re relatively rare — even more so than for home equity lines of credit (HELOCs). Also note that VA loan borrowers can often borrow up to 100% of their equity.

Creditworthiness Requirements for Home Equity Loans

For some lenders, a FICO score of 650 is the home equity cut-off. But many allow credit scores of 620 and above. Below that, your search becomes more difficult.

As with all types of loans, the better your credit score, the cheaper your home equity loan should be. If your score is above 740, you’re likely being offered the lowest interest rate available, all other things being equal. If it’s above 700, you’ll almost certainly get approved and get a very attractive price. If your score is in the high 600s, your application will not necessarily be rejected. But you will probably pay a slightly higher price.

Income requirements for home equity loans

As with any type of home loan, you need a stable income and employment history to qualify for a home equity loan. Lenders want to know that you can afford the ongoing monthly payments.

There is no fixed formula for how a lot of You must earn to be approved for a home equity loan. However, your lender will take a close look at your finances to make sure you can comfortably afford the payments on your new loan. It does this by calculating your debt-to-income ratio. The less you spend on monthly debt compared to your income, the more you can get approved for a home equity loan.

Debt-to-income ratio for a home equity loan

Your debt-to-income ratio (DTI) is the portion of your gross monthly income (before taxes) that goes toward making regular monthly debt payments.

Your projected home equity loan payment is added to your current mortgage and other debt when a lender calculates your DTI to determine if you qualify. Lenders love to see DTIs below 36% and will often reward you with a better interest rate if yours is that low. But many will approve applications with DTIs up to 43 percent.

Payments that count toward your DTI include:

  • Housing expenses, including mortgage, property taxes, homeowners insurance, and homeowners association fees (if applicable)
  • Your new mortgage payment
  • Debt payments, including minimum credit card payments and standard monthly payments on your installment loans (personal, car, student loans, etc.)
  • Child support and alimony and any other court-ordered payments

Your DTI does Not This includes expenses that vary each month, such as groceries, utilities, gas, cell phone subscriptions, and so on.

You can calculate your DTI by adding up your monthly obligations, dividing by your gross monthly income and multiplying by 100. Here’s an example: Your monthly commitments add up to $1,500. And your pre-tax income is $4,000. $1,500 ÷ $4,000 = 0.375 x 100 = 37.5. Her DTI is 37.5 percent. The Consumer Financial Protection Bureau also has a DTI calculator that you can use.

What information is required for a mortgage loan?

A home equity loan is a type of mortgage, and you can expect the application process to be similar to that for your original mortgage. You will be asked to provide standard financial documentation including:

  • Your last two payslips
  • Current statement of your existing mortgage with balance and mortgage payments
  • Tax records for the last two years: W2 for employees or 1040 for self-employed and wage-earners
  • Current and most recent statements for your bank accounts, retirement plans and investment accounts
  • Home insurance statement
  • Divorce decree, if applicable, and any court orders for child support and alimony
  • Award letter or proof of continued receipt for any Social Security benefits and pensions you receive

If you have any dents on your credit report, you can also provide a letter of explanation explaining why they occurred and assuring the lender that you have recovered from previous credit problems.

Can You Be Denied a Home Loan?

Unfortunately, some applicants are being denied their home equity loans. Don’t panic if you are one of them. Try to find another lender who understands your situation better. Some are more flexible than others.

If your application is denied, it’s likely because you don’t meet home equity lender requirements in one of the following areas:

  • Available equity: You typically need more than 20% equity to qualify for a home equity loan
  • credit-worthiness: Few lenders will approve you if your score is below 620. But many will approve you beyond that
  • DTI: If your DTI, including future home loan payments, is over 43%, you may have trouble getting approved

These are typical home loan requirements. But this is a competitive market. And maybe you can find a lender to help you if you don’t meet all three criteria.

Find out if you qualify for a home equity loan

If you meet the basic thresholds for available equity, creditworthiness, and DTI, there’s a very good chance you’ll be approved for a home equity loan. But you won’t know for sure until you apply to a lender.

Remember that the mortgage market is competitive. You can often find a lower interest rate and/or easier approval standards by looking around. So don’t be afraid to get quotes from multiple home equity lenders and compare their quotes.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for the products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policies or position of Full Beaker, its officers, parent companies or affiliates.


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