Mortgage Minute – Can You Get A Home Equity Loan with Low Income?

3 minutes

Getting a home equity loan can be a great way to pay for both planned and unexpected large expenses, but what if your income is relatively low? Can you still tap into the equity in your home?

Making the strategic choice to tap into your home equity to pay for home improvement projects, consolidate your other debts, or fund higher education expenses for yourself or a child may leave you wondering about qualifying for the loan based on your income. Don’t let this hold you back from reaching your financial goals! We’ve got tips and advice to help you get a home equity loan (or HELOC) even if you have low income currently.

The more equity you have, the easier it is to borrow

Home equity is defined as the difference between the current market value of your home and the amount you still owe on your property (if any). This unencumbered amount is what’s still  available for you to borrow against with a home equity loan.

When you go to take out a mortgage loan, lenders will calculate your loan-to-value ratio, or LTV. For home equity loans and HELOCs that are secondary loans (in addition to your first mortgage, in other words), the lender will calculate your combined loan-t0-value ratio, or CLTV.

Example:

Combined loan-to-value ratio is calculated by adding up all of your proposed mortgage debt and dividing by the current market value (or current appraised value) of the home. 

If you owe $250,000 on your home currently and would like to take out a $100,000 home equity line, the total debt would be $350,000 altogether. If your home is worth $500,000, then $350,000 / $500,000 = 70% combined loan-t0-value.

The lower your CLTV is, the easier it is to qualify for a home equity loan and the less important your low income might be.

Many home equity lenders will go up to a 90% or even 95% CLTV, but other aspects of your application will have to be stronger in order to qualify. This includes your credit scores, assets, and your income.

The better your credit scores, the more likely you are to be approved

Since lenders might consider your lower income to be a risk factor when reviewing your home equity loan application, having a high credit score (720+) can help offset this challenge. Make sure your credit scores are in tip-top shape before applying.

If you’re not sure what your credit scores are, you should request a free annual copy of your credit report from each of the credit reporting agencies — Equifax, Experian, and TransUnion. Consider boosting your scores by correcting any mistakes, requesting that derogatory information be removed or updated, or by lowering your overall utilization percentage by paying down accounts near their limits.

Your debt-to-income ratio is more important than just your income

Having a low debt-to-income ratio is especially important for low-income applicants for a home equity line. The lower your debt-to-income ratio, the better your chances of being approved for a loan.

Example:

Your debt-to-income ratio is equal to your total monthly expenses (including your current mortgage payment, property taxes and homeowners insurance as well as your other installment and revolving debts like car loans and credit cards) divided by your gross monthly income.

Some lenders will consider more than just your salary or retirement income, so check to see if they will allow any of the following:

  • Bonus income
  • Overtime income
  • Commission income
  • Rental income
  • Dividends from investments
  • Alimony or child support income

You may even be able to include self-employment income or funds from your side-hustle or gig-economy income.

In general though, you should shoot for a debt-to-income ratio of less than 50% before you consider applying for a home equity loan. Remember, your new payment will be included in these ratios as well.

Achieve your major financial goals with the right home equity loan product

Don’t let your income level keep you from achieving your larger financial goals. Whether you want to use these funds to improve your home, prepare for retirement or an emergency expense, or to pay for your child’s education expenses, the right home equity loan product can help you make your dreams a reality.

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