What Are the Requirements for a Home Equity Loan?

Posted on 6th December 2021
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Home equity is one of the most significant advantages of being a homeowner. Did you know that you’re sitting on a gold mine just by owning your home? By paying off enough of your mortgage or investing in home improvement projects, you’ll be able to utilize the equity in your home for a myriad of purposes. And the best part is that you can borrow and take out lines of credit against this equity.

Are you wondering how you can do this? Well, in Ontario, equity is typically unlocked through home equity loans. In this article, we will break down the requirements for borrowing from your home’s built-up equity.

What is a home equity loan?

A home equity loan is a loan that allows homeowners to borrow against any built-up equity in their home. It is a fixed amount paid in a lump sum to the borrower, who can then make the repayments over a pre-set period. Home equity loans are also locked in at a fixed rate.

Let’s take a look at some of the benefits of home equity loans below:

  1. Flexible: Home equity loans provide borrowers with increased flexibility, as the payments can be interest-only. You’ll also be able to get the funding quickly as a lump sum.

  2. Comparatively low-interest rates: You can expect to receive fair interest rates that allow you to achieve your goals, especially if you refer to a qualified loan broker. The rate is locked in and typically lower than unsecured personal loans and credit cards.

  3. Limited restrictions: You’re able to use the funds as you see fit, whether it’s to take out as cash, for debt consolidation, or retirement.

In addition, a home equity loan has long terms. It can range from anywhere between 5 and 30 years.

Requirements for Borrowing Against Home Equity

Although flexible, there are specific minimum requirements that you need to meet to take out home equity loans in Ontario. These can vary by lender, but there are a few general factors to consider. Let’s examine them below.

Built-Up Equity

You will need a solid amount of equity built up in your home already. Equity can be calculated by the difference between the remaining amount you owe on your mortgage and the home’s overall market value. This is then used to calculate the loan-to-value ratio, also known as the LTV.

Lenders typically want at least 15%-20% of equity built up to offer you a loan safely. However, the amount of built-up equity you need changes depending on the lender you refer to. Banks and traditional financial institutions typically want higher built-up equity, while alternative lenders will accept lower amounts as well.

If you’re looking to build your home equity further, you can do this by paying off more of your mortgage. In addition, renovations that increase property value are a great way to increase equity.

 

Credit History

Traditional banks and financial institutions will only allow you to take out a home equity loan if you have a high credit score and excellent credit history. Referring to alternative lenders is an effective solution, as they will view your credit history in a more lenient light.

Low DTI

DTI refers to the debt-to-income ratio. Lenders will want to ensure that your DTI is low, as it indicates how much you’re borrowing against what you earn. Taking out credit way beyond your means, for example, can be a red flag to lenders that you are trying to live beyond your means.

Sufficient Income

Of course, your income is also a determining factor in taking out a home equity loan. Lenders will check to ensure that your income is sufficient to pay off debts or lines of credit with ease. For self-employed individuals or those with fluctuating income, showing a steady income might prove difficult.

Reliable Payment History

If there are many instances of defaulting or late payments, some lenders may be hesitant to offer you a loan. This one is an important requirement. Lenders will take a deep dive into your transaction and payment history to ensure you’re paying off your debts in a timely and reliable manner. Documentation on any previous mortgages, properties, and repayment histories will be analyzed in great detail.

Taking out home equity loans in Ontario is an excellent way to utilize the resources available to you. You’ll be able to make the most of your home’s equity, as well as fulfill your financial goals. Whether to fund education, pay off debts, or undertake large home improvement projects, home equity loans can help you do it all. And the comparatively better interest rates certainly help too!

You worked hard for your home, so it’s now time to let your home work for you. At Canadalend.com, we help homeowners across Ontario take out money at a locked-in fixed rate, with the flexibility of interest-only payments. And, unlike the big banks, we don’t fuss over your income level or credit history, but instead focus on your home value and outstanding loans.

For more information on home equity loans in Ontario, call Canadalend at 1-866-422-6536 or contact us here.

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