You have equity in your home if your home is worth more than your mortgage’s outstanding balance. If you have equity, you may tap into it with a home equity loan. In order to do so, you must meet the lender’s requirements for a home equity loan including the minimum credit score requirements.
What Credit Score do You Need?
Lenders put a lot of emphasis on the credit score. It tells a lender your level of financial responsibility. It’s not the only factor lenders consider, but it does play an important role. Unlike standard FHA, VA, or conventional purchase loans that have stated requirements, lenders set their own credit score requirements for home equity loans.
In general, if you have at least a 620 credit score, you should find a lender willing to give you a home equity loan. If you have a credit score of 700 or higher, though, you have an even better chance of qualifying for a home equity loan or at least one with better interest rates and fees.
More Than the Credit Score
Your credit score is one of the first factors lenders look at, but it’s not the only factor. Lenders look at the big picture. They want to answer the questions ‘how risky are you?’ For example, a borrower with a 700 credit score but without any income isn’t a good risk. Even though that borrower has great credit, he or she doesn’t have the income to support the new mortgage payment. A borrower with a 700 credit score, consistent income, and a low debt ratio, though, would be an ideal borrower.
Lenders put all of the pieces of the puzzle together. Aside from the credit score, they look at:
- Debt ratio – Your total monthly debts divided by your gross monthly income tells lenders how much of your monthly income covers your debts. A 36% total debt ratio is ideal, but each lender has its own requirements.
- Employment/income – How consistent is your income/employment? Have you been at the same job for many years or just a few weeks? There’s a difference there for lenders. They want to know you have the ability to succeed at the job. The longer you’ve been at the same job, the less risk you pose.
- Value of your home – Lenders typically lend up to 80% of the home’s value. They keep that 20% equity in the home in case you default on your loan. If a lender lets you borrow 100% of the home’s value, the lender could walk away empty-handed if you default on the loan.
Putting it All Together
Lenders take each piece of the puzzle and put it all together. First, looking at your credit score, they decide if they will move forward with your loan application. For example, if a lender requires a 700 minimum credit score and you have a 650 credit score, they probably won’t move any further with your loan application.
If you have a 700 or even a credit score close to the 700 minimum requirement, the lender will likely look at your other qualifying factors to make a decision. The more positive factors you can provide, the higher your chances of approval become. For example, you may have a borderline credit score, but have an exceptionally low debt ratio. A lender may take that risk because you aren’t overextended with monthly liabilities. If you had a high debt ratio and a borderline credit score, it could go the other way.
If you want a home equity loan, try improving your credit score as much as possible. A high credit score opens up more doors with more lenders. A lower credit score doesn’t mean you won’t qualify for a home equity loan, but you may have to work harder for it. In other words, you may have to shop around to find a willing lender. You may also have to jump through a few more hoops to get the approval, meaning proving that you are worthy with consistent income/employment and a low debt ratio.
Check your credit score before you apply for a home equity loan. If it’s less than 680, you may want to see what you can do to improve the score before you apply for a home equity loan.