Things You'll Need:
- A Home
- A job or liquid assets
- income
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Step 1
The first thing you will need to get a home equity loan or line of credit is a home. This is a must, just look at the name of the product.
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Step 2
Banks are looking a 4 things. 1) credit score 2) income 3) how much debt you have 4) available equity in your house. Lets look at all 4 below
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Step 3
Credit score- As you know from all the commercials, the better the credit score the better the rate. This is 100% true, but there are some catches (you will see in the equity section). Credit scores go from 450 to 850. I have heard that only about 1% of the American population has credit scores over 800. I would believe it because from what I have seen most of my clients are below 800. Generally a score of 700 or more is good for a banks best rate. If you are under 700 doesn't mean you can't get a home equity, or that your rate will be terrible, but it will not be as good as someone with a 730 score. Even with a score of 600 you can still get a home equity loan with rates cheaper than most credit cards and possible have a tax deduction (check with your accountant).
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Step 4
Income- The bank cares that you might have a million dollar house with no mortgage, but they also want to see income. Just because you have $500,000 in equity doesn't mean you will get approved. That equity is not going to pay your monthly home equity bill. You will need a job. If you are self employed, the bank may want to see some history and experience in your field. If you were a fireman who just stared a tax consulting firm, you better have about 5 years with your new company or you might get declined. There are some people saying "what if I am retired", or "what if I am just so wealthy I don't work." Well what some banks will do is use your pension and or social security income, annuity income and other sources as long as you can document the income and it will continue for at least 3 years. They will also do a calculation with your total assets (stocks, bonds, mutual funds, CD's etc) and see how long you can live off them assuming a certain rate of return. This income can get you approved.
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Step 5
Debt- This is usually the deal break. You might have great credit, a good paying job, but if you have to much debt (credit cards, mortgage, car loans, student loans, etc.) you will not get approved. Usually the banks like to see that no more that 45% of your income is going to pay off debts. They don't look at utility bills or car insurance. Just debt on your credit report. They will also look to make sure you have not had bankruptcy or any liens on your property.
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Step 6
Equity- This is the available room you have on your property for lending. If you have a house worth $500,000 with a $250,000 mortgage, than you have 50% equity or (loan to value) Some banks will go up to 100% lending, although in these bad times for lenders, they are cutting back. Here is were good credit might not get you the best rate. Banks like to see you have room and you are not maxing yourself out. So you can have an 800 credit score, but if you go over 80% of your house value you might get a higher rate due to risk.
