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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
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If you’re ready to shop for a new home, a mortgage preapproval letter shows sellers that you’re a serious buyer who can secure financing from a lender. It also gives you a clear idea of how much you may be eligible to borrow.
To show lenders that you’re a qualified borrower, you’ll need personal identification, pay stubs, bank account statements, a list of your monthly debts, tax returns, W-2 statements and information about your down payment. You’ll also need to submit to a credit check. Most lenders require a credit score of at least 620 for a conventional mortgage, but a higher score will increase your chances of getting preapproved and can lead to lower rate offers.
The lender may also verify your history of making your rent or mortgage payments on time. Depending on whether the lender has additional questions and how much of its preapproval process is automated, accepted borrowers can expect to receive a preapproval letter anywhere from a few hours to a few days after applying.
Even if you have all of the required documentation and a qualifying credit score, don’t take the application process for granted. Lenders will be scrutinizing your financial readiness. Avoiding potential pitfalls will help keep your homebuying goal on track.
Don’t take on any new debts or lines of credit
Lenders want to see that your finances are stable, including your obligations to creditors. Avoid making large purchases on credit or opening additional credit lines, including new credit cards.
“Making large purchases, such as buying a car or expensive furniture on credit, can significantly impact your debt-to-income ratio” says Matt Vernon, head of consumer lending at Bank of America in Charlotte, North Carolina. “By taking on more debt before obtaining preapproval, you could potentially exceed the debt-to-income ratio threshold that lenders are comfortable with, making it harder to qualify for the mortgage amount you need or to obtain favorable terms.”
Don’t create job or income instability
“Lenders prefer borrowers with stable employment and income histories because they view them as less risky,” says Vernon. He adds that changing jobs or having irregular streams of income can alarm lenders and jeopardize your application, even if your income is higher as a result.
If your income fluctuates or is unpredictable — for instance, if you’re in a commission-based role or self-employed — you will also need to demonstrate that your earnings are consistent enough to make your monthly mortgage payment, says Steve Kaminski, head of U.S. residential lending at TD Bank, also based in Charlotte.
Don’t make large deposits without documentation
“Large, unexplained deposits might raise questions about the source of funds or suggest undisclosed debts, which could impact the borrower’s ability to repay the mortgage,” says Vernon. If you’ve received money from a family member toward a down payment, be prepared to provide the lender with a signed letter from your relative that confirms the funds are not a loan. The lender may also ask for additional documentation, such as withdrawal and deposit slips.
Don’t rush the process
Even if you’re eager to shop for homes, it’s imperative to take your time with your mortgage preapproval application. “If anything’s off or missing, it could slow down or even hurt your preapproval process. Take a little extra time to double-check everything to avoid any delays,” Vernon says.
It’s worth your while to look at multiple lenders. Comparing quotes could get you the lowest rate and save you thousands in interest. Researching and narrowing your lender options during preapproval will help you act quickly once you’ve found a home and are ready to move forward with a mortgage application.
Kaminski says, “There is a lot to consider, and it can be overwhelming when combined with the emotion of home shopping and potential stress of low housing inventory and competitive offers.”
While you can’t control the market, you can present the strongest possible personal financial profile. In addition to providing the right information at the right time, you want to avoid any moves that could damage lenders’ perception of your ability to make loan payments. By getting preapproved, you’ll have successfully completed an important step in your homebuying journey.
Source: nerdwallet.com
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Key takeaways
- Refinancing a rental property can allow you to change the mortgage term, rate or both or take out equity for financial needs.
- To refinance your rental property, be sure you’re up on lender requirements, know your equity and are ready to shop around to find the best rate.
Refinancing isn’t just for a primary residency. Owners of secondary residences or other real estate can save money if they can find the right deal. Knowing when to refinance your rental property comes down to factors like your current mortgage interest rate and remaining term years.
7 reasons to refinance a rental property
Whether you need to make your property expenses more manageable or access cash, refinancing your rentals has clear benefits. Some common reasons to consider a rental refinance include:
Lower your interest rate
Who wouldn’t like to pay less interest on their loan each month? If you see rates dropping and have many years left on your mortgage, refinancing can save you thousands of dollars over the long term.
Lower monthly mortgage payments
You can lower your payment by lowering your interest rate or extending the terms of your mortgage or both. This could increase your monthly take-home earnings from the rental property.
Alter the mortgage term
Refinancing allows you to change the length of your mortgage term. By selecting a 15-year mortgage instead of a 30-year one, you’ll save money on interest over the long run.
Eliminate mortgage insurance
If you have a conventional loan and made less than a 20 percent down payment when you bought the property, you’re probably paying private mortgage insurance. Assuming you now have enough equity, you can eliminate this monthly fee by refinancing. Also assuming you have enough equity, you can refinance an FHA loan to a conventional one to get rid of FHA mortgage insurance premiums.
Get cash for home improvements
If you want to make home improvements, add an addition or expand amenities on the rental property to up the rent or lease, a cash-out refinance may be a good way to pay for it.
Consolidate debt
If there is equity in the home, you can use the cash from a refinance to pay down credit cards or other debt with higher interest rates.
Tap into your home equity
By using the equity in a rental home, you could purchase more rentals or upgrade the ones you own. You could also finance other investments or improve your own home.
How to refinance a rental or investment property
If you’ve decided it’s the right move for you, here’s a breakdown of how to refinance a rental property:
Step 1: Check your equity
Knowing how much equity you need to have in the home before you begin the application process could spare you a rejection. (Equity is your ownership stake — the percentage of the home you own outright.) For most conventional and FHA loans, lenders ask that you have at least 20 percent equity in the property. They may want you to have at least 25 percent equity for a rental refinance.
Step 2: Know the requirements
Lenders generally tend to be less lenient with refinancing requirements on investment properties. Some requirements might include:
- DTI ratio: For a primary residence, lenders may allow you to have a debt-to-income ratio of up to 50 percent if you have savings and good credit. Because lenders may see an investment property as a riskier loan, you may be capped at about 43 percent.
- LTV ratio: The loan-to-value ratio represents how much equity you have in your home. It measures your current loan balance against the current property value. As mentioned above, you may need as much as 25 percent equity in a rental property to refinance it, meaning an LTV ratio no greater than 75 percent.
- Limited number of properties: If you’ve got a large portfolio of rental properties, you may not be able to refinance at your local retail bank or get as good of a loan. Instead, you might do better with an investment property-oriented outfit that offers asset-based lending. “At the bank, not only are you going to have the same property requirements, but you’ll also have personal income requirements,” says Jason Haye, VP national sales manager at Velocity Commercial Capital, which specializes in loans for multi-family and small commercial properties. “We’ll look at the property alone.”
- Appraisal: Your lender will want proof that your property is worth what you say. You can get a broker price opinion in some cases, but the lender will probably insist on an actual appraiser (it’ll arrange it, but you pay for it).
- Tenants: Having tenants is crucial to a rental refinance. “It’s supposed to be an income-based property, and if it’s vacant, it’s generating zero. That’s not good,” says Haye. “It seems basic, but make sure you have a renter in there.”
Step 3: Compare refinance rates and lenders
As with all loans and financial products, it’s a good idea to shop around and talk to a few refinance lenders before you move ahead. By comparing terms, you can determine which offer works best in your situation.
Many lenders who offer lower interest rates have higher origination fees, and vice versa. Be sure to ask about origination fees and other closing costs before you apply and measure that against your interest rate. Getting pre-approved by at least three lenders gives you an idea about your range of choices.
Lenders generally consider rental properties riskier investments than primary residences. As a result, your new rental mortgage rate will probably be higher than what you could get on your main home, says Tom Schneider, VP of product management at Pathway Homes. He explains, “They’re not as great as you might be able to get for your personal property, but there’s not a huge delta.”
The average rental mortgage rate at traditional lenders is usually about 50 basis points higher than that for a primary mortgage, says Schneider. Specialized lenders may charge even higher rates — at least a full percentage point higher — because they cater to a niche market, but they often work fast.
Step 4: Gather your documentation
Refinancing typically requires submitting a lot of documents. Streamlined refinancing is the only exception. Your lender will want to see not only your personal finances and obligations but also reports relating to your rental property’s income. Prepare your documents in advance, including:
- Proof of income: You’ll likely need to provide copies of recent paystubs to confirm your employment and income.
- Tax returns: The lender will also likely ask for copies of tax returns to verify employment history and income.
- Personal details needed for credit check: This includes your consent, full name, address, social security number and date of birth.
- Explanatory letters: If you have any gaps in income or a negative mark on your credit history that needs explaining, you might need to provide the lender with a letter.
- Homeowners insurance policy: You must show the lender you have enough insurance coverage to protect the home and property it is lending a mortgage to.
- Recorded deed: This document shows you have a legal claim to the property.
If your property has been rented in the past, many lenders will allow you to apply 75 percent of the current agreement as part of your income. In other words, if your tenant pays $10,000 annually, you can add $7,500 to your income.
Step 5: Submit your refinance application
If you have your documents ready, you can often submit your application quickly. You may even be able to complete the application online. Most major lenders will need to evaluate and then underwrite your loan in-house, which can take between 30 and 60 days.
Step 6: Close on your new loan
You will need to sign the final documents when the loan is approved.
Should you refinance your rental property?
Before heading to your local lender for a refinance on your rental, take time to consider the benefits and drawbacks of doing so:
Benefits of refinancing a rental property
- Cash for updates. A refinance can provide funds for updating or renovating the property, which could justify raising rent on your asset.
- It provides an opportunity for new terms. You could change your 30-year mortgage to a 15-year mortgage with a refinance.
- You can pay off debt. Using a cash-out refinance could allow you to pay off or down accumulated debts.
Drawbacks of refinancing a rental property
- You’ll have to pay some money upfront. Like any other mortgage, you’ll have to cover closing costs and lender fees. Plus, if you need a property survey or appraisal, you might have to pay for those, too.
- It may not be as affordable as you think. Be sure to factor in all the costs of refinancing a loan, including a change in interest rates, and make sure it’ll save you money.
- You might initially lose equity. If you have been building equity and take a chunk out of it to refinance, your rental property will temporarily lose value as an asset. It will take time to build back up the equity you used.
FAQ about refinancing a rental property
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Yes, you can refinance a rental property if you have tenants. In fact, it may be easier to refinance a property with tenants than a property that is sitting empty.
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Yes. You can use rental income to help qualify for a refinance as long as you can prove that it’s a stable source of income.
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If your mortgage lender doesn’t handle rental property refinancing, it may make sense to consult with a mortgage broker or specialized lender who does to see what options you have. A mortgage broker can shop your information around to various lenders and find you the best deals.
Source: bankrate.com
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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
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As parents, we want the best for our children: health, happiness — and hardy credit. Having a strong credit profile can determine whether your kid gets approved for a loan or how much they’ll pay for car insurance when they’re grown. But establishing credit for someone with no credit history is challenging.
A common workaround is for parents to add their children as authorized users on their credit card accounts. Credit checks aren’t required, and the user can quickly piggyback on the primary cardholder’s credit history. But this arrangement isn’t always the right move. Here’s what to know about the potential limitations of adding your kid as an authorized user and alternative ways they can build credit.
They might be too young to reap the benefits
If you’re hoping to boost your child’s credit before they even learn to tell time, you could face roadblocks. For one, your kid may not qualify for authorized user status. While some card issuers don’t have age restrictions, others require a minimum age of 13 or older.
Even if you can add your child, the issuer may not report their account details to the credit bureaus. Some issuers allow kids as young as 13 to become authorized users but only report credit information for those age 18 and older. It’s wise to ask your credit card company how authorized user arrangements work.
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Misuse can lead to damaged credit
Being an authorized user doesn’t guarantee improved credit. “Same as the primary account holder, it can affect your credit positively or negatively, depending on how the card is used,” says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling.
If you have a record of on-time payments and don’t use too much available credit, that can generate or help your kid’s credit score. But your credit and your child’s can suffer if either person uses the account unfavorably.
Ultimately, it’s up to the parent to keep the account in good standing.
“When you add someone as an authorized user, that’s what they are. They’re authorized to use the card but they are not legally bound to pay the bill. You are legally bound to pay the bill,” says Julie Beckham, an accredited financial counselor and financial educator in the Boston area.
You don’t need to give your kid the credit card. As long as the primary cardholder keeps their account open and active, the authorized user’s credit will share the effects. If you give your child the card, set some ground rules. Talk about when it’s OK to use the card, how much they’re allowed to spend and who will make the payments. Some credit card companies let you place spending limits for authorized users.
Authorized user status might not be enough for future lenders
Some lenders don’t take authorized user accounts into consideration when reviewing credit applications or give them much weight. “If you’re a lender and you’re looking at someone and you see the designation that they’re an authorized user rather than the primary account holder, it’s just telling you that this person did not have to go through a credit approval process to have access to that account,” McClary says.
Having an account in their own name puts your kid in a stronger position because it shows they’re equipped to manage payments. You can guide them toward opportunities in adulthood.
“There are credit-builder loans that are available. There are starter credit cards for young adult consumers, where the threshold for approval is a little bit lower. You can also look at options for secured credit cards that require no credit check, but they require a good faith deposit in order to open the account,” McClary says.
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Explore other ways to get your child credit-ready
The best way to set your child up for success is to talk to them about money, Beckham says.
You could look over your credit reports together or explain how many hours you need to work to pay for things like dinners or fun outings.
Encouraging good routines, like doing chores and turning in homework on time, is also important. “They’re transferable habits that can help them in their life financially as they build credit,” Beckham says.
Give your child opportunities to practice managing money before they graduate to credit. Beckham suggests letting kids test the waters with a checking or savings account. “Starting with their own money is always better because there is a sense of ownership and accountability to that,” she says.
This article was written by NerdWallet and was originally published by The Associated Press.
Source: nerdwallet.com
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A home equity loan is a lump sum of money you can borrow at a fixed rate based on the equity, or ownership stake, in your home. If you already paid off 15% to 20% of your house, this one-time installment loan can be used to cover major expenses, from home renovations to paying off debt.
Home equity loans have fixed interest rates, so your monthly payments are predictable and easy to budget for. But because your home acts as collateral for the loan, you could risk foreclosure if you fall behind on repayments.
I’ve spoken with experts about the advantages and disadvantages of home equity loans, how they work and where to find the best rates. Here’s what I’ve uncovered.
This week’s home equity loan rates
Here are the average rates for home equity loans and home equity lines of credit as of March 27, 2024.
Loan type | This week’s rate | Last week’s rate | Difference |
---|---|---|---|
10-year, $30,000 home equity loan | 8.73% | 8.73% | None |
15-year, $30,000 home equity loan | 8.70% | 8.70% | None |
$30,000 HELOC | 9.01% | 8.99% | +0.02 |
Current home equity loan rates and trends
Though home equity loan rates will vary depending on the lender and loan type, their rates are generally lower than personal loans or credit card annual percentage rates.
Home equity loan rates aren’t directly set by the Federal Reserve, but adjustments to the federal funds rate impact the borrowing cost for financial products like home equity loans and home equity lines of credit, aka HELOCs.
Since March 2022, the Fed has hiked its benchmark rate a total of 11 times in an attempt to slow the economy and bring inflation down, driving home equity loan rates up alongside. Though the Fed has kept interest rates steady since last summer, home equity loan rates have remained elevated for borrowers. Home equity rates are likely to stay high until the central bank begins cutting interest rates, projected for later this year.
With home equity loans, you tap into your equity without giving up the rate on your primary mortgage, making them a popular alternative to cash-out refinances. If you use a home equity loan to install solar panels or renovate your kitchen, you get the added benefit of increasing your home’s value.
“Most homeowners with mortgages in 2024 are choosing home equity loans or HELOCs, instead of a cash-out refinance, to avoid losing their attractive interest rates,” said Vikram Gupta, head of home equity at PNC Bank.
Best home equity loan rates of March 2024
Lender | APR | Loan amount | Loan terms | Max LTV ratio |
---|---|---|---|---|
U.S. Bank | From 8.40% | Not specified | Up to 30 years | Not specified |
TD Bank | 7.99% (0.25% autopay discount included) | From $10,000 | 5 to 30 years | Not specified |
Connexus Credit Union | From 7.20% | From $5,000 | 5 to 15 years | 90% |
KeyBank | From 10.29% (0.25% autopay discount included) | From $25,000 | 1 to 30 years | 80% for standard home equity loans, 90% for high-value home equity loans |
Spring EQ | Fill out application for personalized rates | Up to $500,000 | Not specified | 90% |
Third Federal Savings & Loan | From 7.29% | $10,000 to $200,000 | Up to 30 years | 80% |
Frost Bank | From 7.3% (0.25% autopay discount included) | $2,000 to $500,000 | 15 to 20 years | 90% |
Regions Bank | From 6.75% to 14.125% (0.25% autopay discount included) | $10,000 to $250,000 | 7, 10, 15, 20 or 30 years | 89% |
Discover | 6.99% for 1st liens, 7.99% for 2nd liens | $35,000 to $300,000 | 10, 15, 20 or 30 years | 90% |
BMO Harris | From 8.84% (0.5% autopay discount not included) | From $25,000 | 5 to 20 years | Not specified |
Best home equity loan lenders of March 2024
U.S. Bank
Good for nationwide availability
U.S. Bank is the fifth largest banking institution in the US. It offers both home equity loans and HELOCs in 47 states. You can apply for a home equity loan or HELOC through an online application, by phone or in person. If you want a loan estimate for a home equity loan without completing a full application, you can get one by speaking with a banker over the phone.
- APR: From 8.40%
- Max LTV ratio: Not specified
- Max debt-to-income ratio: Not specified
- Min credit score: 660
- Loan amount: $15,000 to $750,000 (up to $1 million for California properties)
- Term lengths: Up to 30 years
- Fees: None
- Additional requirements: Subject to credit approval
- Perks: You can receive a 0.5% rate discount by enrolling in automatic payments from a U.S. Bank checking or savings account.
TD Bank
Good for price transparency
Primarily operating on the East Coast, TD Bank offers home equity loans and HELOCs in 15 states. You can apply for a TD Bank home equity loan or HELOC online, by phone or by visiting a TD Bank in person. The online application includes a calculator that will tell you the maximum amount you can borrow based on the information you input. You can also see a full breakdown of rates, fees and monthly payments. No credit check is required for this service.
- APR: From 7.99% (0.25% autopay discount included)
- Max LTV ratio: Not specified
- Max debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: From $10,000
- Term lengths: Five to 30 years
- Fees: $99 origination fee at closing. Closing costs only application to loan amounts greater than $500,000.
- Additional requirements: Loan amounts less than $25,000 are available only for primary residence property use.
- Perks: You will receive a 0.25% discount if you enroll in autopay from a TD personal checking or savings account.
Connexus Credit Union
Good branch network
Connexus Credit Union operates in all 50 states, but it offers home equity loans and HELOCs in 46 states (excluding Alaska, Hawaii, Maryland and Texas). The credit union has more than 6,000 local branches. To apply for a home equity loan or HELOC with Connexus, you can fill out a three-step application online or in person. You won’t be able to see a personalized rate or product terms without a credit check.
- APR: From 7.20%
- Max LTV ratio: 90%
- Max-debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: From $5,000
- Term lengths: Five to 15 years
- Fees: No annual fee. Closing costs can range from $175 to $2,000, depending on your loan terms and property location. It has returned loan payments fees of $15, convenience fees of $9.95 (for paying by debit or credit card online) and $14.95 (for paying by phone) and a forced place insurance processing fee of $12.
- Additional requirements: Because Connexus is a credit union, its products and services are only available to members. Member eligibility is open to most people: you (or a family member) just need to be a member of one of Connexus’s partner groups, reside in one of the communities or counties on Connexus’s list or become a member of the Connexus Association with a $5 donation to Connexus’s partner nonprofit.
- Perks: Flexible membership options
KeyBank
Good online application user experience
Based in Cleveland, KeyBank offers home equity loans to customers in 15 states and HELOCs to customers in 44 states. Aside from a standard home equity loan, KeyBank offers a few different HELOC options. The KeyBank application allows you to apply for multiple products at one time. If you’re not sure whether KeyBank loans are available in your area, the application will tell you once you input your ZIP code. If you’re an existing KeyBank customer, you can skim through the application and import your personal information from your account.
- APR: From 10.29% (0.25% client discount included)
- Max LTV ratio: 80% for standard home equity loans, 90% for high-value home equity loans
- Max debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: From $25,000
- Term lengths: One to 30 years
- Fees: Origination fee of $295. Closing costs aren’t specified.
- Additional requirements: Borrowers must be at least 18 years of age and reside in one of the states KeyBank operates in.
- Perks: KeyBank offers a 0.25% rate discount for clients who have eligible checking and savings accounts with them.
Spring EQ
Good option for high debt-to-income ratio limits
Spring EQ was founded in 2016 and serves customers in 38 states. Spring EQ offers home equity loans and HELOCs. Spring EQ doesn’t display rates for its home lending products online — you must complete an application to see your personalized rate. The Spring EQ loan application process is simple though. Customers can see an extensive breakdown of their loan term and rate options without needing to undergo a credit check or provide their Social Security number.
- APR: Not specified
- Max LTV ratio: 90%
- Max debt-to-income ratio: 50%
- Min credit score: 640
- Loan amount: Up to $500,000
- Term lengths: Not specified
- Fees: Spring EQ loans may be subject to an origination fee of $995 and an annual fee of $99 in some states.
- Additional requirements: Spring EQ does not display rates for its home lending products online — you must complete an application to see your personalized rate.
- Perks: Spring EQ has a higher maximum DTI ratio than most other lenders — compare 50% with the typical 43% average.
Third Federal Savings & Loan
Good option for rate match guarantee
Third Federal Savings & Loan first opened in 1938. Today, the bank offers home equity loans in eight states and HELOCs in 26 states. Third Federal offers a lowest rate guarantee on its HELOCs and home equity loans, meaning Third Federal will offer you the lowest interest rate relative to other similar lenders or pay you $1,000. You can apply for a home equity loan or HELOC on the Third Federal website. You won’t have to register an account to apply, but you’re still able to save your application and return to it later.
- APR: From 7.29%
- Max LTV ratio: 80%
- Max debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: $10,000 to $200,000
- Term lengths: Five to 30 years
- Fees: Home equity loans and HELOCs with Third Federal have an annual fee of $65 (waived the first year). There are no application fees, closing fees or origination fees.
- Additional requirements: Specific requirements aren’t listed.
- Perks: If you set up autopay from an existing Third Federal account, you’ll be eligible for a 0.25% rate discount.
Frost Bank
Good option for Texas borrowers
Frost Bank’s home equity loans and HELOCs are only available to Texas residents. You can apply for a home equity loan or HELOC on the Frost Bank website, but you’ll need to create an account. According to the website, the application will only take you 15 minutes.
- APR: From 7.3% (0.25% autopay discount included, only available for 2nd liens)
- Max LTV ratio: 90%
- Max debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: $2,000 to $500,000
- Term lengths: 15 or 20 years
- Fees: No application fee, annual fee or closing costs. Frost Bank does charge a $15 monthly service fee, which can be waived with a Frost Plus Account.
- Additional requirements: Borrowers must reside in Texas. The bank also requires proof of homeowners insurance.
- Perks: 0.25% rate discount for clients who enroll in autopay from a Frost Bank checking or savings account. However, this feature is only available for second liens.
Regions Bank
Good rate discounts
Regions Bank is one of the nation’s largest banking, mortgage and wealth management service providers. Regions offers home equity loans and HELOCs in 15 states. You can apply for a Regions home equity loan or HELOC online, in person or over the phone. You’ll have to create an account with Regions to apply. Before you create an account, though, you can use the bank’s own rate calculator to estimate your rate and monthly payment.
- APR: From 6.75% to 14.125%(0.25% autopay discount included)
- Max LTV ratio: 89%
- Max debt-to-income ratio: Not specified
- Min credit score: Not specified
- Loan amount: $10,000 to $250,000
- Term lengths: Seven, 10, 15, 20 or 30 years
- Fees: No closing costs and no annual fees. Late fees apply for 5% of the payment amount. There is a returned check fee of $15 and an over limit fee of $29.
- Additional requirements: Not specified.
- Perks: Rate discounts between 0.25% and 0.50% to those who elect to have their monthly payments automatically debited from a Regions checking account.
Discover
Good option for no fees or closings costs
Discover is known primarily for its credit cards, but it also offers home equity loans — available in 48 states. The lender does not offer HELOCs at all. You can apply for a home equity loan from Discover online or over the phone. The application process takes approximately six to eight weeks in total, according to Discover’s website.
- APR: 6.99% for first liens, 7.99% for second liens
- Max LTV ratio: 90%
- Max debt-to-income ratio: 43%
- Min credit score: 620
- Loan amount: $35,000 to $300,000
- Term lengths: 10, 15, 20 and 30 years
- Fees: None
- Additional requirements: Specific requirements not listed.
- Perks: The lender charges no origination fees, application fees, appraisal fees or mortgage taxes.
BMO Harris
Good option for second liens
BMO Harris products and services are available in 48 states (all but New York and Texas). BMO Harris offers home equity loans and three variations of a HELOC. You can apply for a home equity loan or HELOC online or in person, but in order to get personalized rates, you’ll have to speak with a representative on the phone. Getting personalized rates doesn’t require a hard credit check.
Home equity loans from BMO Harris are only available as second liens. If you have already paid off your mortgage, a rate-lock HELOC from BMO Harris may be a better option.
- APR: From 8.84% (0.5% autopay discount not included)
- Max LTV ratio: Not specified
- Max debt-to-income ratio: Not specified
- Min credit score: 700
- Loan amount: From $5,000
- Term lengths: Five to 20 years
- Fees: There is no application fee. BMO Harris will also pay closing costs for loans secured by an owner-occupied 1-to-4-family residence. If you pay off your loan within 36 months of opening, you may be responsible for recoupment fees.
- Additional requirements: Home equity loans are only available as a second lien (meaning you can’t be mortgage free)
- Perks: If you enroll in autopay with a BMO Harris checking account, you’ll be eligible for a 0.5% rate discount.
What is a home equity loan?
A home equity loan is a fixed-rate installment loan secured by your home as a second mortgage. You’ll get a lump sum payment upfront and then repay the loan in equal monthly payments over a period of time. Because your house is used as a collateral, the lender can foreclose on it if you default on your payments.
Most lenders require you to have 15% to 20% equity in your home to secure a home equity loan. To determine how much equity you have, subtract your remaining mortgage balance from the value of your home. For example, if your home is worth $500,000 and you owe $350,000, you have $150,000 in equity. The next step is to determine your loan-to-value ratio, or LTV ratio, which is your outstanding mortgage balance divided by your home’s current value. So in this case the calculation would be:
$350,000 / $500,000 = 0.7
In this example, you have a 70% LTV ratio. Most lenders will let you borrow around 75% to 90% of your home’s value minus what you owe on your primary mortgage. Assuming a lender will let you borrow up to 90% of your home equity, you can use the formula to see how that would be:
$500,000 [current appraised value] X 0.9 [maximum equity percentage you can borrow] – $350,000 [outstanding mortgage balance] = $100,000 [what the lender will let you borrow]
A standard repayment period for a home equity loan is between five and 30 years. Under the loan, you make fixed-rate payments that never change. If interest rates go up, your loan rate remains unchanged.
Second mortgages such as home equity loans and HELOCs don’t alter a homeowner’s primary mortgage. This lets you borrow against your home’s equity without needing to exchange your primary mortgage’s rate for today’s higher rates.
Home equity loans have fixed interest rates, which is a positive if you’re looking for predictable monthly payments. The rate you lock in when you take out your loan will be constant for the entire term, even if market interest rates rise.
Reasons to get a home equity loan
A home equity loan is a good choice if you need a large sum of cash all at once. You can use that cash for anything you’d like — it doesn’t have to be home-related.However, some uses make more sense than others.
- Home renovations and improvements: If you want to upgrade your kitchen, install solar panels or add on a second bathroom, you can use the money from a home equity loan to pay for the cost of these renovations. Then, at tax time, you can deduct the interest you pay on the loan — as long as the renovations increase the value of your home and you meet certain IRS criteria.
- Consolidating high-interest debt: Debt consolidation is a strategy where you take out one large loan to pay off the balances on multiple smaller loans, typically done to streamline your finances or get a lower interest rate. Because home equity loan interest rates are typically lower than those of credit cards, they can be a great option to consolidate your high-interest credit card debt, letting you pay off debt faster and save money on interest in the long run. The only downside? Credit card and personal loan lenders can’t take your home from you if you stop making your payments, but home equity lenders can.
- College tuition: Instead of using student loans to cover the cost of college for yourself or a loved one, you can use the cash from a home equity loan. If you qualify for federal student loans, though, they’re almost always a better option than a home equity loan. Federal loans have better borrower protections and offer more flexible repayment options in the event of financial hardship. But if you’ve maxed out your financial aid and federal student loans, a home equity loan can be a viable option to cover the difference.
- Medical expenses: You can avoid putting unexpected medical expenses on a credit card by tapping into your home equity before a major medical procedure. Or, if you have outstanding medical bills, you can pay them off with the funds from a home equity loan. Before you do this, it’s worth asking if you can negotiate a payment plan directly with your medical provider.
- Business expenses: If you want to start a small business or side hustle but lack money to get it going, a home equity loan can provide the funding without many hoops to jump through. However, you may find that dedicated small business loans are a better, less risky option.
- Down payment on a second home: Homeowners can leverage their home’s equity to fund a down payment on a second home or investment property. But you should only use a home equity loan to buy a second home if you can comfortably afford multiple mortgage payments over the long term.
Experts don’t recommend using a home equity loan for discretionary expenses like a vacation or wedding. Instead, try saving up money in advance for these expenses so you can pay for them without taking on unnecessary debt.
Pros
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One lump sum payment of total loan up front.
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Fixed interest rate, meaning you won’t have to worry about your rate rising over the repayment period.
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Typically lower interest rate than credit cards or personal loans.
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Little to no restrictions on what you can use the money for.
Cons
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Your home is used as collateral, meaning it can be taken from you if you default on the loan.
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If you’re still paying off your mortgage, this loan payment will be on top of that.
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Home equity loans can come with closing costs and other fees.
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May be hard to qualify for if you don’t have enough equity.
Home equity loan vs. HELOC
Home equity loans and HELOCs are similar but have a few key distinctions. Both let you draw on your home’s equity and require you to use your home as collateral to secure your loan. The two major differences are the way you receive the money and how you pay it back.
A home equity loan gives you the money all at once as a lump sum, whereas a HELOC lets you take money out in installments over a long period of time, typically 10 years. Home equity loans have fixed-rate payments that will never go up, but most HELOCs have variable interest rates that rise and fall with the prime rate.
A home equity loan is better if:
- You want a fixed-rate payment: Your monthly payment will never change even if interest rates rise.
- You want one lump sum of money: You receive the entire loan upfront with a home equity loan.
- You know the exact amount of money you need: If you know the amount you need and don’t expect it to change, a home equity loan likely makes more sense than a HELOC.
A HELOC is better if:
- You need money over a long period of time: You can take the money as you need it and only pay interest on the amounts you withdraw, not the full loan amount, as is the case with a home equity loan.
- You want a low introductory interest rate: Although HELOC rates may increase over time, they also typically offer lower introductory interest rates than home equity loans. So you could save money on interest charges.
Home equity loans vs. cash-out refinances
A cash-out refinance is when you replace your existing mortgage with a new mortgage, typically to secure a lower interest rate and more favorable terms. Unlike a traditional refinance, though, you take out a new mortgage for the home’s entire value — not just the amount you owe on your mortgage. You then receive the equity you’ve already paid off in your home as a cash payout.
For example, if your home is worth $450,000, and you owe $250,000 on your loan, you would refinance for the entire $450,000, rather than the amount you owe on your mortgage. Your new cash-out refinance home loan would replace your existing mortgage and then offer you a portion of the equity you built (in this case $200,000) as a cash payout.
Both a cash-out refi and a home equity loan will provide you with a lump sum of cash that you’ll repay in fixed amounts over a specific time period, but they have some important differences. A cash-out refinance replaces your current mortgage payment. When you receive a lump sum of cash from a cash-out refi, it’s added back onto the balance of your new mortgage, usually causing your monthly payment to increase. A home equity loan is different — it doesn’t replace your existing mortgage and instead adds an additional monthly payment to your expenses.
Who qualifies for a home equity loan?
Although it varies by lender, to qualify for a home equity loan, you’re typically required to meet the following criteria:
- At least 15% to 20% equity built up in your home: Home equity is the amount of home you own, based on how much you’ve paid toward your mortgage. Subtract what you owe on your mortgage and other loans from the current appraised value of your house to figure out your home equity number.
- Adequate, verifiable income and stable employment: Proof of income is a standard requirement to qualify for a HELOC. Check your lender’s website to see what forms and paperwork you will need to submit along with your application.
- A minimum credit score of 620: Lenders use your credit score to determine the likelihood that you’ll repay the loan on time. Having a strong credit score — at least 700 — will help you qualify for a lower interest rate and more amenable loan terms.
- A debt-to-income ratio of 43% or less: Divide your total monthly debts by your gross monthly income to get your DTI. Like your credit score, your DTI helps lenders determine your capacity to make consistent payments toward your loan. Some lenders prefer a DTI of 36% or less.
A home equity loan is better if:
- You don’t want to pay private mortgage insurance: Some cash-out refinances require PMI, which can add hundreds of dollars to your payments, but home equity loans don’t.
- You can’t complete a refinance: With rates rising, it’s possible that your mortgage rate is lower than current refinance rates. If that’s the case, it likely won’t make financial sense for you to refinance. Instead, you can use a home equity loan to take out only the money you need, rather than replacing your entire mortgage with a higher interest rate loan.
A cash-out refinance is better if:
- Refinance rates are lower than your current mortgage rate: If you can secure a lower interest rate by refinancing, this could save you money in interest, while providing access to a lump sum of cash.
- You want only one monthly payment: The amount you borrow gets added back to the balance of your mortgage so you make only one payment to your lender every month.
- Less stringent eligibility requirements: If you don’t have great credit or you have a high debt-to-income ratio, or DTI, you may have an easier time qualifying for a cash-out refi compared with a home equity loan.
- Lower interest rates: Cash-out refinances sometimes offer more favorable interest rates than home equity loans.
Tips for choosing a lender
You’ll want to consider what type of financial institution best suits your needs. In addition to mortgage lenders, financial institutions that offer home equity loans include banks, credit unions and online-only lenders.
“Select a lender that makes you feel comfortable and informed with the home equity loan process,” said Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans. “Look at what tools a lender makes available to borrowers to help inform their decision. For many borrowers, being able to apply and manage their application online is important.”
One option is to work with the lender that originated your first mortgage as you already have a relationship and a history of on-time payments. Many banks and credit unions also offer discounted rates and other benefits when you become a customer.
Some lenders offer lower interest rates but charge higher fees (and vice versa). What matters most is your annual percentage rate because it reflects both interest rate and fees.
Ensure the specific terms of the loan your lender is offering make sense for your budget. For example, be sure the minimum loan amount isn’t too high — be wary of withdrawing more funds than you need. You also want to make sure that your repayment term is long enough for you to comfortably afford the monthly payments. The shorter your loan term, the higher your monthly payments will be.
“Costs and fees are an important consideration for anyone who is looking for a loan,” Cook said. “Homeowners should understand any upfront or ongoing fees applicable to their loan options. Also look for prepayment penalties that might be associated with paying off your loan early.”
No matter what, it’s important to talk to numerous lenders and find the best rate available.
How to apply for a home equity loan
Applying for a home equity loan is similar to applying for any mortgage loan. You’ll need both a solid credit score and proof of enough income to repay your loan.
1. Interview multiple lenders to determine which lender can offer you the lowest rates and fees. The more companies you speak with, the better your chances of finding the most favorable terms.
2. Have at least 15% to 20% equity in your home. If you do, lenders will then take into account your credit score, income and current DTI to determine whether you qualify as well as your interest rate.
3. Be prepared to have financial documents at the ready, such as pay stubs and Form W-2s. Proof of ownership and the appraised value of your home will also be necessary.
4. Close on your loan. Once you submit your application, the final step is closing on your loan. In some states, you’ll have to do this in person at a physical branch.
FAQs
As of March 27, average home equity loan rates are 8.73% for a $30,000 10-year home equity loan and 8.70% for a $30,000 15-year home equity loan — higher than the average rate for a 30-year fixed rate mortgage, which is currently 7.01%. Both home equity rates and mortgage rates started off at historic lows at around 3% at the beginning of 2022 and have been consistently climbing in response to the Federal Reserve aggressively raising the benchmark interest rate.
Most lenders will allow you to borrow anywhere from 15% to 20% of your home’s available equity. To calculate your home equity, subtract your remaining mortgage balance from the current appraised value of your home. How much equity a bank or lender will let you take out depends on a number of additional factors such as your credit score, income and DTI ratio. For most homeowners, it can take five to 10 years of mortgage payments to build up enough tappable equity to borrow against.
A home equity loan can affect your score positively or negatively depending on how responsibly you use it. As with any loan, if you miss or make late payments, your credit score will drop. The amount by which it will drop depends on such factors as whether you’ve made late payments before. However, HELOCs are secured loans that are backed by your property, so they tend to affect your credit score less because they’re treated more like a car loan or mortgage by credit-scoring algorithms.
Lenders are currently offering rates that start as low as 5% to 6% for borrowers with good credit, but rates can vary depending on your personal financial situation. A lender will base your interest rate on how much equity you have in your home, your credit score, income level and other aspects of your financial life such as your DTI ratio, which is calculated by dividing your monthly debts by your gross monthly income.
Home equity loans can be used for anything you choose to spend the money on. Typical life expenses that people usually take out home equity loans for are to cover expenditures such as home renovations, higher education costs like tuition or to pay off high-interest charges like credit card debt. There’s a bonus for using your loan for home improvements and renovations: the interest is tax deductible.
You can also use a home equity loan in the event of an emergency like unplanned medical expenses. Whatever you chose to use your loan for, keep in mind that taking out a large sum of money that accrues interest is an expensive choice to carefully consider, especially because you’re using your home as collateral to secure the loan. If you can’t pay back the loan, the lender can seize your home to repay your debt.
Methodology
We evaluated a range of lenders based on factors such as interest rates, APRs and fees, how long the draw and repayment periods are, and what types and variety of loans are offered. We also took into account factors that impact the user experience such as how easy it is to apply for a loan online and whether physical lender locations exist.
Source: cnet.com
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If you’re an 18-year-old with no credit history, you can get a loan, but your choices may be more limited. You may have to tap into alternative options and sources, such as loans with a cosigner.
That’s because lenders like to lend to people with a history of borrowing and on-time payments. Oftentimes, young people just starting out have no credit history. This means they have no credit accounts in their name or haven’t used credit for a long period of time and the information has been removed from their credit history. Without credit, it can be difficult to access loans or credit cards, rent an apartment or buy a house, and obtain certain subscriptions.
Let’s take a closer look at loans for 18-year-olds.
Benefits of Loans for 18-Year-Olds
Two important benefits of getting a loan as an 18-year-old include gaining access to funds and building up credit history.
Access to Funds
The obvious benefit of getting loans as a young person is that you will have access to the money you need. Depending on the type of loan you get, you may be able to use the funds for a variety of purposes, including:
• Education
• Purchasing big-ticket items, such as a car
• Personal expenses, such as medical or wedding expenses
Build Up Your Credit History
Loans allow you to start building up your credit history, which can help you meet goals such as:
• Getting a cellphone
• Accessing utilities in your name
• Qualifying for a credit card
• Getting good rates on insurance, a mortgage, or auto loan
Plus, establishing a strong record of borrowing and repayment can position you well for future borrowing.
💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.
Cons of Loans for 18-Year-Olds
While there are benefits to getting a loan when you’re 18, there are downsides to consider as well. Let’s take a closer look at a few.
Limited Loan Amounts
You may not be able to borrow a large loan amount when you’re young and just starting out. For example, if you want to purchase a $500,000 home as an 18-year-old and have no credit history, you’ll likely have difficulty qualifying for this type of loan.
Potentially High Rates
It’s possible to get a loan with no credit as a young person, but lenders may charge a higher interest rate than if you had an established credit history.
Why is that the case? Lenders try to assess your risk level when you apply for anything from a personal loan to a credit card. If they can’t see evidence that you have successfully made loan payments, they may not grant you a loan or they may compensate for that risk by charging you a higher interest rate.
Some lenders consider other aspects of your profile beyond credit history, including whether you can comfortably afford your payments.
Risk of Getting Into Debt
According to a consumer debt study conducted by Experian, Generation Z (those aged 18-26) had a non-mortgage debt average of $15,105 in 2023. This includes credit cards, auto debt, personal loans, or student loans.
While carrying any level of debt can be stressful, there are also financial implications to consider. For starters, if you don’t pay off your balance in a timely way, interest can start to build. Credit cards tend to carry higher interest rates than home or auto loans. This means wiping out credit card debt could take a long time if you only pay the minimum amount.
Then there are potential penalties to be mindful of, such as late fees. You may also face collection costs if you don’t pay your bills, which will remain on your credit report and potentially impact your credit score for years.
Recommended: Why Do People Choose a Joint Personal Loan?
Is a Co-Signer Required When Applying for Loans as an 18-Year-Old?
Not all lenders require a cosigner, so be sure to ask if you’ll need one. In most cases, a loan without a cosigner will likely have a lower loan amount and a higher interest rate.
What exactly is a cosigner? Simply put, it’s a person who agrees to take responsibility for a loan alongside the primary borrower. If one person fails to make payments, it will affect the other person’s credit score.
Applying for a loan with a co-borrower or cosigner can be a quick way to get accepted for a loan.
Understanding Your Loan Status
Like many financial processes, applying for a loan involves multiple steps. Here’s a general idea of what’s involved:
• Pre-approval: Pre-approval means that your lender takes a look at your qualifications (including a soft credit check). A soft credit check is an inquiry of your credit report.
• Application: In this part of the process, you submit a formal application, and your lender will verify your information.
• Conditional approval: You may also get conditional approval for your loan, which means the lender may likely approve you to get a loan as long as you meet all the requirements.
• Approval or denial: Finally, you’ll either get approved or denied for the loan.
Your lender should be clear with you at every step of the application process.
Recommended: How to Get Approved for a Personal Loan
Private Lender Loan Requirements for 18-Year-Olds
There are no hard-and-fast requirements that encompass private lender requirements. However, lenders generally look at an applicant’s credit score, debt, and income.
Credit Score
There’s no universally set minimum credit score requirement for a loan because rules can vary by lender. It’s worth noting that low-to-no-credit borrowers may be able to access a loan.
Debt and Income
Lenders will check to see how much debt you have and calculate your debt-to-income (DTI) ratio, which ideally should be less than 36%. To figure out your DTI, lenders add up your debts and divide that amount by your gross income.
Lenders will also look at your income to ensure you can make monthly payments on your loan. This can include income from your job, a spouse’s income, self-employment, public assistance, investments, alimony, financial aid for school, insurance payments, and an allowance from family members.
Tips for Getting Loans as an 18-Year-Old
If you’re ready to get a loan as a young person, you can take steps to help boost your odds of getting approved.
Show Your Savings
Show the lender what you’ve saved in your accounts, which may include:
• High-yield savings accounts
• Certificates of deposit (CDs)
• Money market account
• Checking or savings accounts
• Treasuries
• Bonds, stocks, real estate, and other investments
Demonstrating savings can help you show that you can repay your loan.
Show Proof of Income
Lenders will likely require you to provide proof of income so they can see how you’ll pay for your loan. But remember, this doesn’t mean just the money you earn from a job. Consider other types of income you receive. For instance, you may not initially think of alimony as a source of income, but a lender might.
Apply for a Lower Amount
Lenders may deny your loan if you choose to borrow more money than you can realistically repay. So if you’re young and have no credit history, you may be able to increase your chances of getting a loan if you apply for a lower amount. You may also want to consider this strategy if you’re denied for a loan and want to reapply.
💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.
The Takeaway
While most 18-year-olds don’t have a large income or lengthy credit history, that doesn’t mean you can’t qualify for a personal loan. Just remember that funding choices may be more restricted, and you might not qualify for a large amount. If you’re having trouble getting approved, you may want to consider asking someone to cosign the loan, showing proof of income and savings, or applying for less money.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Are there loans for 18-year-olds without a job?
You can get a loan without a job. However, you’ll need to show a lender that you have some form of consistent income, such as through investments, alimony, financial aid, or another source of cash flow.
Are there loans for 18-year-olds without credit?
Yes, loans do exist for 18-year-olds with no credit history. But note that even if you qualify for a loan without credit, it may be a lower amount than you could qualify for if you had a lengthy credit history. You may also not be able to get a low interest rate.
Can I get a loan as an 18-year-old?
Yes, 18-year-olds can get a loan. Your age matters less than your credit history and credit score — or the availability of a cosigner. Keep in mind that you may have trouble getting a loan if you don’t meet a lender’s qualifications. Contact a lender to learn more about your options.
How can I build credit as an 18-year-old?
If you want to start building credit, it may be worth exploring a secured credit card. Similar to a debit card, this type of credit card requires you to put down a cash deposit to insure any purchases you make. For example, putting down a $1,000 deposit, and that becomes your starting credit line on your card.
Photo credit: iStock/SeventyFour
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com
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A personal loan is a flexible lending product that can be used for anything from covering the cost of a home repair to consolidating high-interest debt. While there’s no universally required credit score for a personal loan, you generally need a score of at least 610 to qualify, and an even higher score to get a lender’s best rates.
That said, some lenders offer personal loans for no credit, and even for bad credit. To make up for the increased risk, however, they will typically charge high interest rates.
Read on for a closer look at the minimum credit score for a personal loan, how your credit score can impact loan amounts and interest rates, plus other factors lenders look at when considering an applicant for a personal loan.
What Personal Loans Are and How They Work
A personal loan enables you to borrow a specific amount of money to use in virtually any way you like — unlike a mortgage or auto loan which is earmarked for one specific purpose. Personal loans are offered by banks, credit unions, and online lenders and are generally unsecured (meaning you don’t have to pledge an asset to secure the loan).
Common uses of personal loans include home renovations, vacations, weddings, car/home repairs, medical expenses, moving expenses, major purchases, and credit card consolidation.
Once you get approved for a personal loan, you receive the funds in one lump sum up front then repay the money (plus interest) in monthly installments over a set period of time, called the loan term.
💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.
Awarded Best Personal Loan by NerdWallet.
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What You Need to Qualify for Personal Loans
These are a few factors lenders take into consideration when deciding whether or not to offer you a personal loan, as well as how much to offer and at what rate. Here’s a look at what you may need to qualify.
Credit Score
A credit score is a three-digit number (typically between 300 and 850) designed to predict how likely you are to pay a loan back on time based on information from your credit reports. There is no universally set minimum credit score for personal loans but many lenders require applicants to have a minimum score of around 620. To get approved for a lender’s lowest rates, however, you may need a credit score closer to 690.
That doesn’t mean borrowers with lower scores or thin credit are out of luck. Some lenders offer personal loans to applicants without any credit history at all. There are also personal loans on the market designed for applicants with poor or bad credit. Keep in mind, though, that these loans often come with high rates and less-than-favorable terms.
Debt-to-Income Ratio
Lenders will also look closely at an applicant’s debt-to-income (DTI) ratio, which measures the percentage of a person’s monthly income that goes to debt payments. You generally want your DTI to be as low as possible because that indicates that your income is well above what you need to cover your monthly expenses.
If you’re applying for a personal loan, lenders typically want to see a DTI of 35% to 40% or less. A lender might allow a higher DTI, however, if you have a strong credit score or other compensating factors, like enough money in your savings account to cover several months of living expenses.
Income
To make sure that borrowers have the cash flow to repay a new loan, lenders typically have minimum income requirements for personal loans. Income thresholds vary widely by lender — some require applicants to earn at least $45,000 per year, while others have a minimum annual income requirement of just $20,000. Lenders don’t always disclose their income requirements, so you may not be able to discover these minimums before you apply for a personal loan.
Lenders see your income by looking at your monthly bank statements, last two years of tax returns, and pay stubs. Some lenders also require a signed letter from an employer. If you are self-employed, you can provide tax returns or bank statements to show proof of income.
💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.
Personal Loan Options by Credit Score
When it comes to having the right credit score for a personal loan, there is no one set score that disqualifies someone from getting their hands on one. That said, having a FICO® Score in the good range (670-739) or higher gives applicants the widest range of lending opportunities and the most favorable interest rates. Take a closer look at how different FICO credit score ranges can affect lending opportunities.
FICO Credit Score Range | Rating | Lending Opportunities |
---|---|---|
800+ | Exceptional | Wide variety of lending products, favorable interest rates, larger loan amounts |
740-799 | Very Good | Wide variety of lending products, favorable interest rates, larger loan amounts |
670-739 | Good | Wide variety of lending products, good loan amounts, fair interest rates |
580-669 | Fair | Can qualify for some lending products with slightly higher interest rates |
580 | Poor | Limited lending opportunities, smaller loan amounts, typically high interest rates |
Exceptional
An exceptional credit score qualifies applicants for the widest variety of personal loan options, the most favorable interest rates, and larger loan amounts.
Very Good
Having a very good credit score qualifies applicants for most if not all of the same rates and lending opportunities as exceptional applicants.
Good
Having a good credit score puts a borrower near or slightly above the average of U.S. consumers, and most lenders consider this a good score to have. Applicants shouldn’t struggle to find a personal loan, but they may not be approved for the lowest interest rates.
Fair
Because a fair credit score is below the average score of U.S. consumers, many lenders will approve loans with this score, but rates and terms might not be as desirable as they are for higher scores.
Poor
A poor or “bad” credit score is well below the average score of U.S. consumers and demonstrates to lenders that the applicant may be a lending risk, which greatly limits the applicant’s borrowing options. If they do qualify for a personal loan they likely can expect to be approved at high interest rates.
Alternatives to Personal Loans
If your credit score makes it difficult to qualify for a personal loan, you may want to explore alternative lending options. Here are some to consider.
• Credit card cash advance: Consumers with credit cards may be able to request a cash advance from their credit card, which can make it easy to get access to cash quickly. These cash advances typically come with higher interest rates than a regular credit card purchase.
• Peer-to-peer loans: There are some web-based lending sites that offer some flexibility in qualification requirements. Since these sites are not lenders, and more like matchmakers, they may help you find an investor who is willing to look at other factors besides your credit score.
• Cross-collateral loans: If you already have a loan secured by collateral with a lender (such as auto loan or mortgage), you may be able to qualify for another loan with the same lender using that same collateral. However, not all lenders allow cross-collateral loans. And there are risks involved for borrowers. To have a lien released from the asset used as collateral, you typically need to pay both loans in full.
Personal Loan Rates From SoFi
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is a different credit score required for loans of different sizes?
Generally, the higher your credit score, the larger the loan you can qualify for. Maximum amounts for personal loans range from $500 to $100,000. If you have strong credit, you may qualify for a larger loan than you need. Be sure to consider how much you can afford to repay each month before deciding what size loan to take out.
Can you get a personal loan without having a credit score at all?
There are some personal loans on the market with no credit check. Since the lender can’t rely on your credit history, they will typically focus on other indicators of your ability to pay back the loan, such as your income, employment history, rental history, and any previous history with the lender.
When applying for a personal loan with no credit check, you’ll want to carefully weigh the benefits against the costs. Lenders will often charge higher interest rates and impose more fees to lessen their risk.
Can getting a personal loan affect a credit score?
Getting a personal loan can affect credit scores both positively and negatively. Applying for a personal loan typically results in a hard credit inquiry, which may cause a small, temporary drop in your credit score. On the flip side, taking out a personal loan can have a positive impact on your credit by increasing your credit mix. Making on-time payments can also improve your credit profile. (Late payments, however, can have a negative impact on your credit.)
Photo credit: iStock/Moyo Studio
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Source: sofi.com
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Having a list of mortgage questions to ask potential lenders is just the start. Knowing the answers you’re looking for puts you ahead of the game.
1. Which type of mortgage is best for me?
This question will help you determine whether you’re talking to a salesperson or a quality advisor. When you ask, “What are my options?” for each type of loan discussed, the mortgage lender should tell you the pros and the cons in light of your situation.
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2. How much down payment will I need?
A 20% down payment is every lender’s ideal, but it’s not always required. Qualified buyers can find mortgages with as little as 3% down, or even no down payment. Again, there are considerations for every down payment option. The best lenders will take the time to walk you through the choices.
3. Do I qualify for any down payment assistance programs?
If you’re interested in local, state and national down payment assistance programs, lenders with knowledge of them — and the wherewithal to help you navigate the process — are well worth the hunt.
4. What is my interest rate?
You probably already planned to ask this mortgage question. It’s the one benchmark we all understand. Or do we? Lenders can move the needle on your mortgage interest rate a number of ways, most of them involving additional fees.
But after talking to at least a couple of lenders, you’ll get an idea of a ballpark interest rate you’ll qualify for. Let’s say it’s 6%. We’ll call that your payment interest rate because that’s what your monthly mortgage payment will be based on.
Knowing that, you’ll move on to the next — and very important — question, about the annual percentage rate, or APR.
By the way, if you’re considering an adjustable-rate mortgage rather than a fixed-rate loan, you’ll want to ask: How often is the payment interest rate adjusted? What is the maximum annual adjustment? What is the highest cap on the rate?
5. What is the annual percentage rate?
Now that you have an idea of what your payment rate will be, it’s time to find out what your annual percentage rate is. The difference between the two? The APR incorporates all of the embedded fees of the loan.
Ask your lender if any discount points are included in your APR. To make an apples-to-apples comparison among lenders, the answer you’re looking for is “No.” You can always decide later to buy discount points, which are extra fees you pay upfront to lower your interest rate.
When you have zero-discount-point APRs from competing lenders, you can see who has the lowest fees for the same payment rate.
In our example of receiving a 6% payment rate, you’re looking for the lowest APR based on that payment rate. Maybe one lender offers you a 6.25% APR, and another a 6.5% APR. The 6.25% APR lender is charging you fewer fees.
A higher APR isn’t always a bad thing.
Say you’re buying your “forever home.” If you buy discount points to lower your payment rate, you’ll have a higher APR. But after some years, you’ll make up for the additional fees by paying less in interest thanks to that lower payment rate.
6. Are you doing a hard credit check on me today?
It’s always good to know when the lender is going to perform a “hard” credit check, called a “hard inquiry.” That type of payment history inquiry shows up on your credit report. Lenders need to do this to give you a firm interest rate quote.
When you’re shopping more than one lender, you’ll want these hard credit pulls to occur within a short period of time — say within a few weeks or so — to minimize the impact on your credit score.
7. Do you charge for an interest rate lock?
Once you’ve decided on a lender, you may want to lock in your interest rate. This ensures that it doesn’t go up — though it won’t go down, either.
Some lenders charge a fee to lock in your rate. Others don’t — but the cost might be rolled into your interest rate and other lender fees. The answer you’re looking for on a typical home loan (not a construction loan) is: There’s no charge for an interest rate lock.
8. Will I have to pay mortgage insurance?
If you put down less than 20% on a conventional loan, the answer will probably be “Yes.” Mortgage insurance on government-backed loans works differently. For example, read more about FHA mortgage insurance.
Even if the mortgage insurance is “lender paid,” it’s likely passed on as a cost built into your mortgage payment, which increases your rate and monthly payment. You’ll want to know just how much mortgage insurance will cost and if it’s an upfront or ongoing charge, or both.
Then, ask the lender what your options are. The answer may be just, “Make a bigger down payment.”
Or you may find there are other loan programs that you might qualify for that don’t require mortgage insurance.
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9. What will my monthly payment be?
You’ve probably asked this question already. But knowing what your monthly mortgage payment will be is kind of key to the whole deal, right? You’ll also want to ask if there is any prepayment penalty if you pay off the mortgage early — for instance, if you sell your home or refinance. The answer should be “No.”
10. Do you have an origination fee?
An origination fee provides additional profit for the lender beyond what’s built into the interest rate. A good follow-up question: What are all of your lender fees? Be sure to specify “lender fees.” They’ll know what you mean because there are other additional costs, which you’ll ask about next.
These costs will be detailed in your official Loan Estimate document and your Closing Disclosure. But the sooner you know what they are, the better you can shop, compare — and prepare — for them.
11. What other costs will I pay at closing?
Fees charged by third parties, such as for an appraisal, a title search, property taxes and other closing costs, are paid at the loan signing. You can also see these costs in your Loan Estimate and Closing Disclosure.
12. How — and how often — will I be updated on the loan’s progress?
Will you have a single point of contact throughout the mortgage loan process? And how will you be updated on the progress: by email, phone or an online portal? Establishing your service expectations upfront, and seeing just how eager the lender is to meet them, will give a clear point of comparison among lenders.
13. Do I have to sign all the paperwork in person?
A mortgage e-closing is likely to proceed faster than a traditional mortgage closing, and you’ll probably be better informed about what’s happening every step of the way.
One other benefit of e-closings: Electronic documents can’t be submitted with a missing signature. On a paper document, a missing signature might not be detected immediately, causing headaches and delays.
14. How long until my loan closes?
Of course, you want to know what your target closing and move-in dates are so you can make preparations. And just as important: Ask what you should avoid doing in the meantime — like buying new furniture on credit and other loan-busting behavior.
Source: nerdwallet.com
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The home buying process involves many steps, but it always starts with getting preapproved for a mortgage. A preapproval letter shows that a lender has checked your credit report and approved you to take out a mortgage.
It can be tempting to skip over the mortgage preapproval process and go straight to looking at potential homes, but this is almost always a mistake. Getting preapproved will ensure that real estate agents and home sellers know you’re a serious buyer. It will also give you more room to negotiate on your offer.
Plus, preapproval gives you a better idea of what kind of home you can afford to buy. Let’s look more closely at what mortgage preapproval is and how you can get started.
How does a preapproval letter work?
In the home-buying process, a preapproval letter serves as tangible proof to potential sellers that the borrower has secured financing. This letter is generated by a lender after evaluating a borrower’s financial information, including credit score, income, and assets. It’s an assurance to sellers that the borrower is financially capable of following through on the purchase.
The preapproval process starts with the borrower submitting an application to the lender, who then conducts a thorough evaluation of the borrower’s finances. Based on this information, the lender will determine the maximum loan amount for which the borrower is eligible and issue the preapproval letter.
Preapproval letters are valid for a specified amount of time – usually between 60 and 90 days. During this time, the borrower can confidently make an offer on a property, demonstrating their commitment and financial stability to the seller.
While a preapproval letter is not a guarantee, it’s an important step in streamlining the home-buying process. It can make all the difference in helping the borrower secure their dream home.
Why You Should Get a Preapproval Letter
The process of buying a home can be overwhelming and stressful, but obtaining a preapproval letter can help alleviate some of those worries. This letter serves as a crucial first step in the home-buying journey, providing potential sellers with the assurance that you are a serious and financially capable buyer.
By taking the time to secure a preapproval letter, you will have a much clearer understanding of your borrowing power and what you can afford. Not only does a preapproval letter give you a competitive edge in a crowded housing market, but it can also save you time and heartache in the long run.
With this letter in hand, you can confidently make an offer on a property. This is because you have taken the necessary steps to secure financing and increase your chances of having your offer accepted.
So, whether you’re a first-time homebuyer or an experienced real estate investor, getting a mortgage preapproval letter should be at the top of your to-do list.
Preparing for Preapproval
Getting preapproved alerts you to any potential problems with your credit or income. Many people have issues with their credit that they need to clear up before obtaining a mortgage will be possible.
If you know about these issues, you can take the necessary steps to clean up your credit first. It’s much harder if you go house hunting first, find a home you love, and then realize you’re not prepared to buy it just yet.
For that reason, preapproval will help you be taken more seriously by sellers and listing agents. Sellers want to accept an offer that they are reasonably certain will go through.
Home loan preapproval assures them that you’re in a position to be able to close on the home. This is especially important in a seller’s market where there could be multiple offers on one home.
And finally, being preapproved for a mortgage gives you more clarity when you start looking at different homes. Without a preapproval letter, you’re really just guessing when it comes to the type of home you think you can afford. Getting preapproved takes all the guesswork out of it.
Preapproval vs. Prequalification
Many people use the terms preapproval and prequalification interchangeably, but they are two different things. Getting prequalified is similar to preapproval, but it’s not quite as accurate or thorough.
When you get prequalified for a mortgage, your lender won’t pull your credit and won’t ask for as much information about your finances. This obviously makes it much less time-intensive for you, but it also means that the information you receive is an estimate that could change.
In comparison, with preapproval, your lender will check your credit and do a more thorough examination of your finances. Because this process is much more comprehensive, you’ll receive a more accurate estimate of how much you’re approved to borrow.
What You Need for a Successful Mortgage Preapproval
Your loan officer will require a lot of documentation before they preapprove you for a mortgage. This can be quite tedious.
But the good news is, you already have access to all the information needed. So, it’s really just a matter of gathering all the necessary paperwork to submit to your lender.
Here is an overview of the documents and information you’ll need to get preapproved:
- A good credit score: Unless you’re applying for an FHA loan or VA loan, you’re going to need a good credit score to get preapproved for a mortgage. Most mortgage lenders require a minimum credit score of 620 to qualify. However, you’ll receive the lowest interest rate if your credit score is 760 or higher.
- Employment history: Your mortgage lender will want to see proof of employment before they’ll be willing to preapprove you for a mortgage. You’ll need to provide copies of your tax returns as well as your annual W-2. Your lender may even contact your employer to verify your employment status and income.
- Proof of assets: You’ll also need to provide evidence that you can afford to pay the down payment and closing costs on your new home. This can typically be done by providing pay stubs, tax returns, or bank statements. If you aren’t able to pay the standard 20% down payment, you must purchase private mortgage insurance (PMI).
- Your debt-to-income ratio: Debt-to-income ratio (DTI) is the percentage of gross monthly income that goes toward debt payments, such as credit cards, auto loans, and student loans. You must let your lender know of your monthly debts, since this will affect your debt-to-income ratio. You can provide a list with all of your outstanding debt, as well as the loan balance and minimum monthly payments.
- Additional documents: Your lender will likely want additional information, like your Social Security Number and your driver’s license. And if you’ve been through a divorce or owe alimony payments, you’ll need to provide documentation of that as well.
How to Get Preapproved for Your Mortgage
Hopefully, by this point, you understand what mortgage preapproval is and why it’s so important. Here are the five steps you’ll need to take to get preapproved for a mortgage loan.
1. Check your credit report
Before you even begin the preapproval process, it’s a good idea to request a copy of your credit report from the three major credit bureaus. You can receive your free annual copies at AnnualCreditReport.com.
That way, you’ll know where you stand when it comes to your credit history. And this will give you a chance to review your credit report for any errors or delinquent accounts. It’s a good idea to resolve these issues before applying for mortgage preapproval.
2. Gather the necessary documentation
Take the time to gather the necessary paperwork before you approach your lender. This ensures that you go into the mortgage process prepared, and will help things move along much more smoothly.
3. Submit your application
Now it’s time to apply for preapproval. Your loan officer may have you apply for preapproval online. Answer all the questions as accurately as you can, and submit all the necessary paperwork.
It may be a good idea to apply for preapproval with multiple lenders. This allows you to compare your options and get the most favorable terms possible.
4. Receive your offers
Once your lender has reviewed your credit score and financial information, you’ll receive several recommended mortgage options. At this point, you’ll see how much you’ve been approved for and your recommended loan types. You’ll also get an idea of what your estimated monthly mortgage payment and interest rate might be.
5. Receive your preapproval letter
Once you’ve chosen your mortgage option, your lender will send you a preapproval letter. You can take this letter with you as you begin shopping for your home.
Bottom Line
Applying for mortgage preapproval is probably the least exciting part of the mortgage process, but it’s an essential first step every new homebuyer should take. Getting a preapproval letter will let you know what kind of home you can afford, and it will give you an advantage when you’re negotiating with sellers.
However, keep in mind that a mortgage preapproval is not a guarantee. If you suddenly lose your job or your financial situation unexpectedly changes, then the previous offer will no longer stand. But it’s as close to a guarantee as you can get before finally closing on your home.
Frequently Asked Questions
Why does it matter if I receive a preapproval letter?
It’s essential to get preapproved for your mortgage for a couple of reasons. First, it gives you a realistic picture of the type of house you can afford. And sellers will take your offer more seriously if you’ve already been preapproved for a mortgage.
What is the difference between a mortgage prequalification and preapproval?
Getting prequalified for a mortgage is much less thorough than a preapproval. Your lender won’t run a credit check, and they won’t review your finances as carefully. This makes it much less accurate than receiving a preapproval letter.
If you go through the process of getting preapproved, then it’s likely you’ll be able to close on a home, unless something drastic happens. But if you’ve only been prequalified, your offer could change once the lender does a more in-depth credit check and financial review.
When should I get preapproved?
You should get preapproved before you start looking at homes. That way, you’ll know what kind of home you can afford before you start shopping for a new home.
Will getting preapproved for a mortgage hurt my credit score?
As part of the preapproval process, your lender will conduct a hard inquiry on your credit report. Typically, this can hurt your credit score slightly. However, multiple hard inquiries for a home loan shouldn’t hurt your credit score.
Source: crediful.com