Home equity loans and home equity lines of credit offer funds to complete home improvements, repairs, and sudden expenses. The loans provide adequate money to cover the sudden costs and offer a wealth of benefits.
The choice between the two loan products depends on how the consumer wants to pay back the loan and how they want to acquire funds. Regardless of their choice, the consumer must meet certain prerequisites to qualify.
What is the Difference?
The home equity loans are a lump sum loan that gives consumers the exact value they want immediately upon approval. The consumer pays back the loan in monthly installments that are calculated with a fixed interest rate.
The home equity line of credit starts with an approval for a maximum credit line. The consumer borrowers up to the maximum value as they need it. The full amount isn’t given to the consumer all at once. They borrow as much as they want throughout the draw period. Once the draw period ends, the consumers pay back the loans in installments. The HELOC rates are at a variable interest, compared to a fixed product.
What are the Eligibility Requirements?
The minimum credit score to qualify for either a home equity loan or line of credit is typically around 620, but lenders prefer a credit score of 700 or greater in order to get the most favorable interest rates on the market. It is still possible to qualify even if you do not meet the minimum requirement, as other areas are also taken into consideration.
Your equity is a large factor, as the more you own in your home and less the mortgage balance, the more likely you would be approved, compared to being already on the borderline of the maximum of 80%.
The lender also needs documented proof of your income level that shows that you are able to repay the loan. If you have excessive debt, it is less likely that you will qualify. The debt-to-income ratio must show that the estimated loan value won’t present a financial hardship when added to your current monthly obligations, so a full review of your credit report and monthly payments will be taken into account.
It’s best to be truthful up front, not only to disclose all of your debts, but hiding what would negatively impact your approval will only hurt you in the end you already question your ability to repay the loan. The high-end of the ideal ratio would be under 45%.
How to Get Approved Even with Bad Credit
If it is less likely to get approval from a traditional lender, credit unions are often a better choice, and they offer bad credit loans if you prove your creditworthiness. Providing documentation of a higher than average income, or showing that you make money on the side from a side gig, helps you improve your chances.
Documentation that shows all your assets and your current status for paying loans off that were used to obtain the assets helps, too. If you show your lender that you aren’t high risk and can afford the loan, then you have a better chance of getting approved.