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Qualifying for a Home Equity Loan or Credit Line

Lenders use several criteria to qualify a homebuyer
for a home equity loan. The most important criteria include: 1) the home appraisal; 2) your credit rating; 3) your capacity to repay (income ratios); and 4) your employment.
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Qualifying for a Home Equity Loan:

Home Value

Lenders will not extend a loan amount that exceeds the value of your home

Since a home equity is secured in 2nd position by the value of your home, lenders will use your home value to determine how much loan amount that you qualilfy for

Regardless of what you are willing to pay for the home, lenders would be taking a sizable risk if you defaulted on the loan.

That is why lenders complete a market valuation or a complete home appraisal before they qualify any home equity amount. The appraisal must be comparable with similar homes in the surrounding neighborhood.


Most lenders qualify loan amounts using a Long-to-Value (LTV) calculation

Which means that they will underwrite a loan at the LTV percentage of the appraised or market value of the home minus any amount that you still owe on your first mortgage and/or 2nd and 3rd mortgages.

This is calculated by taking:

    Property Value
    (times) % LTV
    (minus) Mortgage Balance

The LTV rule protects the bank in the event of non-payment or market declines. The lower the LTV percentage, the less rish that bank will have to take translating into best rate and terms.


That is why the value of your home is an important component lenders use to qualify you for a loan amount

We have more information about market values and LTV:


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Qualifying for a Home Equity Loan:

Your Credit Rating

Your credit report is used by banks and other lending institutions to determine your credit worthiness.

The report lists any payment delinquencies that you may have had over the past three years.

While information regarding your credit habits for the last three years appears on your credit report, no adverse credit information, with the exception for bankruptcy, may be kept on file for more than seven years.


The report can be a factor in a lending institution's decision to approve or decline your home equity application.

You should review your credit report for any errors before applying for a home equity.

Lending institutions review the following information from your credit report to determine your creditworthiness:

— your current outstanding debt
— places and number of times you've applied for credit
— the kind of credit you have taken out in the past
— late payments
— over extension of your credit lines
— liens
— garnishments
— bankruptcy


You need a credit history of at least one year to ensure a good credit report.

A credit score determines the rate the lender may charge you. The credit score estimates your ability to repay a loan as evidenced by your credit history.

Lenders will sometimes give you a better rate based on a good credit report.

Further, a lending institution is less likely to be concerned over an occasional late payment if you have a good credit report rather than a fair credit report.


Establishing a good credit report can payoff in lower rates and better loan management.

For more information: link to our credit management center for credit report information, repair, and management:

go to: credit management center

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Qualifying for a Home Equity Loan:

Your Capacity to Repay

Your capacity to repay your equity loan is an important factor for lending institutions to qualify an applicant for a loan.

If capacity ratios are too high, you will need to change one of the following parameters in order to qualify:

  • reduce your borrowed requests
  • increase your income
  • pay off outstanding debts


Lenders use two debt ratios

1: The "housing ratio": calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

    • mortgage loan payment on your home including interest and principal
    • real estate taxes
    • hazardous insurance
    • private Mortgage Insurance, if any
    • other mortgage related insurance
    • homeowner's association dues
    • ground keeping fees
    • property leases
    • other special assessments and financing

Monthly Income includes the following:

    • employment income
    • overtime bonuses and commissions
    • net self employment income
    • alimony, child support and income from public assistance
    • social security, retirement, and VA benefits
    • workman's compensation or permanent disability payments
    • interest and dividend income
    • income from trust, partnerships, etc.
    • net rental income

Housing Ratio Calculator
Input the following data to calculate your housing ratio:

If you don't have your real estate tax or insurance figures, the American Housing Survey at
shows that the median taxes paid averaged $10 per $1,000 in home value. The property insurance paid averaged $30 per month.

You can lookup your property tax assessments by community:

Private Mortgage Insurance (PMI) will be required if your down payment is less than 20% of the home purchase price. Your PMI monthly cost will average 0.005 of the borrowed amount divided by 12.

use this calculator to calculate the monthly expense from an annual amount

Enter the estimated monthly mortgage payment or enter your loan parameters below:

Equity loan amount:
Repayment terms:
Equity oan rate (APR): %
Estimated Taxes per Month:
Estimated Insurance per Month:
Estimated Other Expenses per Month:

Total Monthly Income:

Housing Ratio
(should be around or less than 28%):

2: The "debt-to-income ratio" calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, debt ratio should not exceed 36%.

What are your fixed monthly expenses:

    • monthly housing expenses included above
    • monthly installment loan payments
    • monthly revolving credit line payments
    • real estate loan payment on non-income producing property
    • alimony and child support
    • any tax or legal assessments.

Debt-to-Income Ratio Calculator
Input the following data to calculate your housing ratio:

Estimated Total Housing Expense (from above):
Est. Total Monthly Installment Loan Payments:
Est. Total Monthly Revolving Credit Line Payments:
Est. Monthly R. Estate Non-Income Loan Payments:
Est. Monthly Alimony and Child Support Payments:
Est. Monthly Tax and Legal Assessments:
Est. Monthly Other Payments:

Total Monthly Income (from above):

Debt-to-Income Ratio
(should be around or less than 36%):

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Qualifying for a Home Equity Loan:

Your Employment

Your capacity to repay the loan is contingent on your employment and other income sources.

Lenders like to see home equity applicants in steady jobs with verifiable income.

Lenders will likely call your employer to verify your employment position and salary/wages.

Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for a loan.


Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income

These documents will include your personal tax filings and other information as required.

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Home Equity Application


Current Prime Rate: 3.25%
Equity Rate Range * LTV Type
(-0.50 to 0.25%)
80% LINE
(0.25 to 1.50%)
90% LINE
(0.00 to 2.50%)
80% LOAN
(2.50 to 3.75%)
90% LOAN
* sample home equity rate ranges: see notes