What you need to know when applying for a home equity
If you’ve paid down your mortgage or the property value rises, you may be able to apply for a loan to pay for home improvements, consolidate high-interest debt, or any other expenses.
But what is required to borrow from your home’s equity?
The requirements for a home equity loan vary. Here is some guidance to help you with the application process.
Determining your home’s equity
Equity is calculated by subtracting the amount you owe on your mortgage from the home’s current value. This number is used to calculate the loan-to-value ratio (LTV) by dividing the current loan balance by the home’s appraised value.
Adirondack Bank will subtract any existing mortgage balance from the appraised value to determine the remaining equity for home equity loan.
The LTV ratio determines whether you qualify for a home equity loan and how much you can borrow. In general, you look at a combined loan-to-value ratio (CLTV). CLTV is determined by adding the balances of all outstanding loans and dividing it by the property’s current market value.
Your lender may require an appraisal to determine the amount you’re eligible to borrow in order to confirm your home’s fair market value.
You can build your home equity in different ways. By making mortgage payments, it will increase the equity in your home. To build the equity faster, you can also make more than the minimum payment.
By maintaining a certain percentage in equity, it is important in the event the real estate market hits a downturn and your property’s value decreases to a level close to the balance you owe on your mortgage. Keep in mind that if you max out your financing, it could be more difficult to sell your home.
Check your credit score
To qualify, Adirondack Bank requires a minimum credit score of 650.
Debt-to-income ratio
Lenders also consider your debt-to-income ratio (DTI) when reviewing your application. DTI limits can vary; check with Adirondack Bank for full details.
To determine your DTI, add up the total monthly house payment, including principal, interest, taxes, homeowner’s insurance, direct liens and any other outstanding debt deemed legally liable. Your debt total is divided by the gross monthly income to determine the DTI ratio. The gross monthly income includes salary, commissions and bonuses, rental income, spousal support, and any other income sources.
Before applying, determine your DTI. To lower your DTI, pay off as much debt as possible to improve your odds of qualifying for a home equity loan and boost your overall financial future.
Sufficient income
Your income will be evaluated to make sure you make enough to repay the loan. It will also determine how much you will be able to borrow.
Having a higher income or ways to boost it before applying will improve your DTI. You will be asked to provide income verification once you agree to proceed with the loan process. This may include paystubs or W-2s.
Reliable payment history
Your payment history will also be evaluated to make sure there isn’t too much risk. This includes how often you pay your bills on time. A history of late payments is risky even if your credit score is good.
Interested in a home equity loan?
If you’re interested in applying for a home equity loan with Adirondack Bank, contact a Branch Banking Representative today and let us review the options and requirements with you.
The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.
