As for credit scores, the requirements vary greatly by lender and type of loan.
"Our minimum credit score is 620 (for a home equity loan), but the market is all over the place," says Gary Harman, vice president of home equity for Discover Financial Services. "If you wanted a HELOC, you would need a better score."
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Mike Kinane, senior vice president for consumer lending at TD Bank, says homeowners generally need a minimum credit score of 660 to 680 for equity loans. But that depends on other factors, such as how much equity they have and their income compared with their monthly debt obligations.
Generally, it helps if your debt-to-income ratio, or DTI, is in the low 40s, Kinane says. But the lender's decision is based on a combination of factors, in which equity plays a major role.
Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Debt payments / income
For example: Jessie and Pat together earn $10,000 a month. Their total debt payments are $3,800 a month. Their debt-to-income ratio is 38%.
$3,800 / $10,000 = 0.38
"There's rarely the perfect applicant with the perfect credit," Kinane adds. "If we have an individual that has plenty of equity and slightly higher debt-to-income ratio, we are more likely to make an exception to make that work because the equity is there, so we do use equity to offset other characteristics that might not be as pristine."
Foreclosures and short sales
A previous foreclosure or short sale could hurt the chances of getting an equity loan even if your score is good, Harman says.
"You need to have a good score, responsible prior credit use and good performance in prior mortgages," he explains. "People who went through foreclosure would have a problem even if their scores have rebounded."