Who Qualifies for Home Equity Loans in Canada?
A Home Equity Loan is a loan obtained on a property that already has a primary mortgage. The house itself serves as collateral for both the primary mortgage and any second mortgage, which means that failure to pay either could result in the property being forfeited. If homeowners need cash but do not want to sell their homes, they may consider obtaining a home equity loan.
Home equity loans are typically reserved for expenses that may increase the property’s overall value, such as any renovation or the addition of a bedroom. However, it is not uncommon for home equity loans to be used for other purposes, such as debt consolidation or paying for a child’s post-secondary education.
Below are some requirements that you’ll need to meet to qualify for a Home Equity Loan:
1. Credit Score
A credit score is a primary requirement for home equity loan approval. A credit score of 680 or higher than this can enable you to qualify for a loan if you meet the equity requirements. Most lenders, however, prefer a credit score of at least 700. Homeowners with credit scores ranging from 621 to 679 may also be approved in some cases. Some lenders will make loans to people with credit scores lower than 620, but they may need the borrower to have additional equity in their home and carry less debt relative to their income. Bad credit home equity loans will have higher interest rates, lower loan amounts, and shorter terms.
2. Debt-to-Income Ratio
Debt-to-income ratio is another important factor. Debt to income ratio percentage should be as low as possible. DTI qualifying ratios will differ from lender to lender. Some lenders require that your monthly debts be less than 36% of your gross monthly income, while others may be willing to go as high as 43% or 50%.
3. Must Have Sufficient Income
Although there is no specific income requirement for home equity products, many will assess your earnings to ensure you can repay your loan. Your income level may also influence how much you can borrow. More importantly, having a higher income or figuring out how to increase your income before applying for a home equity loan will expand your debt-to-income ratio.
4. A Reliable Payment History
Lenders want to ensure they’re not taking on too much risk when deciding whether to make loans. The most important way to determine this is to examine potential borrowers’ payment history. While your payment history is factored into your overall credit score, lenders may dig deeper to see how you pay your bills, are they paid on time? Or you miss the deadline. Lenders will offer you fewer loans if your credit score is perfect but you have a history of late payments. This is just because they do not want to risk losing money if you are unable to pay your bills.
Looking for Help With Your Mortgage?
If you need any help regarding the mortgage or have queries, don’t hesitate to contact us. At Leap Financial we have a professional team of mortgage experts and mortgage brokers. If you are considering buying your first home, looking for 2nd mortgage, want to go for refinancing , or looking for a home equity loan, we can help you in every aspect. Contact us now and get your loan approved!