Tapping into home equity is often a strategic choice that homeowners make when faced with large financial outlays, such as home improvement projects and paying off high-interest debt. The good news is that the more equity that you have in your home, the easier it will be for you to acquire the home equity line of credit (HELOC) that you need, even if you currently have a low income. Whether you want to consolidate credit card, medical, or auto debt, renovate your home or pay for a child's college education, with the following tips you won't have to let low income stop you from achieving your larger financial goals.
Tip #1. Ensure that you have 30% or more equity in your home
Home equity is the difference between what you owe and the value of your home. Before you can receive a home equity line of credit, your chosen lender will calculate the loan-to-value ratio, or LTV. The LTV is calculated by dividing your current loan balance by the current appraised value of your home.
When you want to take out another loan on your home, in this case a HELOC, the lender will calculate your combined loan-to-value ratio, or CLTV, before approving your loan application. The CLTV is determined by adding the amount of money that you want to borrow to your current loan balance before dividing by the appraised value. For example, if you want to borrow $40K, you owe $160K and the home is worth $460K, then you would use the following calculations. ($160K + $40K) / $460K = .43. Your CLTV is 43%.If your CLTV is too high, you might not qualify for a home equity line of credit, or at least will only be approved to borrow less. In either case, you may not be able to tackle your larger financial projects. To overcome these challenges, make sure that you have 30% or higher equity in your home and that your CLTV is lower than 80%. Figure will lend up to 95% CLTV, but at this higher range other aspects of your application have to be stronger, such as assets, FICO score, or income. The lower your CLTV, the less important those other numbers are.
Tip #2. Apply for a home equity line only if you have a high credit score
Low income can be seen as a high risk factor for HELOC applicants. To overcome this challenge, you should verify your monthly income and applicable assets. You should also make sure that you have a high credit score. Not only should you have a score that is well above 700, but you should also verify that you have a long history of maintaining a high credit score. Figure will consider applicants with FICO scores as low as 600, but lower FICO scores means other parts of your application should be stronger.
Not sure what your FICO score is? You can request a free credit report from Experian, TransUnion and Equifax before you apply for a home equity line. Consider boosting a lower FICO score before applying, particularly if your income is low. Additionally, if there is a mistake on your credit report, then you should report the issue to the credit bureau and check back later to see that the error has been corrected. Your credit score is likely to increase after the mistake has been fixed.
Tip #3. Keep your debt-to-income ratio below 50%
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 debt-to-income ratio can be calculated by adding the total monthly costs to finance and maintain your home (such things as mortgage principal, interest, taxes and homeowners insurance) and dividing by your gross monthly income. If applicable, your gross monthly income will include your base salary, commissions, bonuses and any other income sources (such as rental income, investment dividends and spousal support). As a general rule of thumb, your debt-to-income ratio should be below 50% before you apply for a home equity line. Keep in mind that, unlike most traditional banks, Figure will consider more than just regular W-2 salary income in your application. This means that gig-economy or self-employment income can help boost your application.
Tip #4. Apply for a Figure home equity line
Individuals with low incomes can turn to Figure for a home equity line. In addition to your primary residence, you can take out a Figure home equity line on second homes, vacation homes and investment properties. Before applying for a HELOC from Figure, ensure that your legal name is listed on county records as the owner of the property. Additionally, you will need to complete the automated application process, which includes verification of income from approved banking institutions.
You can cite as many bank accounts as you want on your HELOC application. You can also cite 401K, IRA, Roth IRA, savings, money market, brokerage and CD accounts in verifying your income and asset level. Additionally, you can use an approved payroll provider and an approved e-filing tax preparation service to verify your income.
Achieve your major financial goals with the right home equity product
Don’t let your income level stand in the way of achieving your larger financial goals. Whether you want to improve your home in preparation for retirement, are interested in consolidating debt, or want to pay for a child’s college education, a home equity line of credit from Figure can help you make your dreams a reality. To learn more about how you can receive a HELOC despite a low income, contact a member of the Figure team today.