How difficult is it to get a home equity loan?

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What is home equity?

Home equity can be defined as the difference between the value of your home and the unpaid balance of your current mortgage.

For example, if the value of your home is $250,000 and you have a balance left of $150,000 left to pay on your mortgage then you have $100,000 in home equity. The equity on your home can increase in two different ways. One is as you pay down your mortgage the equity increases. The other happens if the value of your home decreases.

Homeowners can borrow money from their home equity. Typically speaking, interest rates on loans secured with home equity are significantly lower than other types of loans because on home equity loans you use your home as the collateral. However, potential borrowers have to undergo an approval process to borrow from their home equity. Although typically a safe and secure loan it does carry the risk of the homeowner losing their house if they are unable to repay their loan.

How difficult is it to get a home equity loan?

There are several requirements homeowners need to meet in order to qualify for a home equity loan here in Canada. The requirements vary greatly based on the lender. For the most part traditional financial institutions and banks have strict rules for giving home equity. On the other hand, private lenders typically have more relaxed terms and conditions and therefore may give loans on your home’s  equity more easily than big banks. The following are the general requirements that one has to fulfill in order to qualify for a home equity loan in Canada:

  1. A loan to value ratio that is lower than 80%: You need to have equity in your home of at least 20% of its value to qualify for a home equity loan. The number is determined by an appraiser.
  2. A debt-to-income ratio between 43% to 49%: The debt-to-income ratio is the percentage of monthly gross income that goes toward paying your debts.
  3. A credit score that is 620 or higher: Your credit score is a reflection of how likely you are to pay your bills on time. Your lender will usually take note of your credit score and credit history. For them, the higher the score the lower the risk they have to take. Banks and financial institutions are very strict about this. Private lenders are more willing to lend to homeowners with lower credit scores.

The above outlines the what makes you a good candidate for a home equity loan. Having a home and substantial equity does not always mean you qualify for a home equity loan. You may have secured a mortgage however things change and you may not be able to pay back a home equity loan. The following are a list of things that could prevent you from qualifying for a home loan equity.

  1. If you are self-employed you cannot verify your income.
  2. You have a poor credit history.
  3. You have too much additional debt.
  4. Mortgage rules have been refreshed.
  5. The value of your house has substantially lowered.

We’re here to answer any questions that you might have on home equity loans! Contact us today!

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