How to get a home equity loan with high DTI

Home equity levels in the United States continue to soar, but 67% of homeowners are finding it difficult to keep up with expenses. Unfortunately, that home equity wealth is not always available to help when homeowners need it the most. Unlocking the equity in your home can be challenging when the ratio of your monthly debts to your monthly income, also known as your DTI or debt-to-income ratio, is too high. 

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Fortunately, challenging does not mean impossible. Let’s learn more about getting a home equity loan with high DTI. 

How a home equity loan works

A home equity loan is similar to a second mortgage. You get a lump sum in exchange for a predictable, fixed-rate monthly payment. 

• Borrowing amount - You can generally borrow up to 80% of your home equity, though some lenders will go as high as 85%. Home equity loans can start as low as $10,000 or $25,000 – and go all the way up to $500,000 and beyond. 
• How repayment works – HELOCs are a fixed-rate product with terms ranging from 5 to 30 years. You make monthly payments towards your interest an principal until your loan is repaid. 

Home equity loan requirements

Lenders generally look for the following when checking if you qualify for a home equity loan: 

• Credit score – You’ll generally need a fair-to-good credit score, at least 680, to qualify for a home equity loan. A higher score means better rates. 
• DTI - The most common DTI cutoff for home equity lenders is 43%, although this can vary depending on the lender. 
• Income – In addition to verifying how much of your monthly income services debt, you’ll also need to show that you have a steady income. 
• LTV (loan-to-value) – Your lender will require you to have sufficient equity to borrow against for a home equity loan, typically at least 15% to 20%. 

How to calculate your DTI

Simply put, your DTI is a measurement of what percentage of your income goes towards servicing existing debts. To calculate your DTI, just add up all your monthly debt payments and divide your total monthly debt payments by your gross monthly income (that means pre-tax). 

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Your DTI includes your mortgage payments, credit cards, student loans, personal loans, and any other debt. It does not include groceries, discretionary spending, or any other non-debt expenses. 

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Expert tip: For credit card debt, use the minimum monthly payment, even if you are making larger payments to pay down your credit card balances. 

Home equity loan with high DTI: What to know

There are a few things to keep in mind when shopping for a home equity loan (or a home equity line of credit) with a high DTI. 

Challenges of getting a home equity loan with high DTI

When you are looking to get a home equity loan, high DTI creates its own set of challenges. Here are some to look out for: 

• Cost – While home equity loans tend to come with competitive rates, the best interest rates are reserved for the most qualified borrowers. If you have a high DTI, you will never be eligible for the best advertised rates. 
• Lenders – Not every lender is willing to work with homeowners whose DTI is outside the conventional range. Lenders who offer more flexibility can sometimes be less scrupulous. This makes comparison shopping extraordinarily important. 
• Borrowing amount – If you are looking for a hefty check size from your home equity loan, you may find yourself less than satisfied. Because lenders are likely to have an eye on your post-funding DTI, they may restrict how much of your equity you can take out. 

Opportunities in getting a home equity loan with high DTI

While it may be more challenging to look for home equity financing with a high DTI, there are still compelling reasons to move forward. 

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A home equity loan can provide you with the cash infusion you need to make ends meet and improve your financial health. 

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Loan aggregators, such as Bankrate, Credible, and LendingTree can be a great place to start your search. 

Tips to get a home equity loan with a high DTI 

Take the following steps to improve your chances of qualifying for a home equity loan with high DTI: 

• Ask your local credit union – Credit unions are not-for-profit financial institutions, and tend to offer more favorable terms to their members. If you bank with a local credit union, they may consider offering you a home equity loan even if your financial profile is imperfect. 
• Prequalify with multiple lenders – Never accept the first offer. Look for multiple options and shop around to find your best rate. Prequalifying generally involves a soft pull and should not affect your credit score. 
• Improve your credit score – Speaking of your credit score, having a better score will increase your chances of qualifying even with a high DTI. Review your credit report for inaccuracies, use debt consolidation loans strategically, and prepare your finances for close examination by your lender. 
• Increase your income - Besides your debt, the key component of your DTI is your income. Increase your income by taking on additional shifts, adding a side hustle, or even asking for a raise at your primary job. 
• Consider a co-signer – A co-signer can sometimes improve your chances of qualifying. Ask a trusted loved one with excellent DTI and credit to co-sign your loan. Just remember: failure to make payments on time will damage your loved one’s credit – and the relationship. 
• Wait and pay off debt first – The best rates and the largest home equity loan offers will always go to borrowers with the best financial characteristics. If you are unhappy with the current crop of offers, spend a few months paying down debt to improve your DTI and try again. 

When does it make sense to get a home equity loan?

Whether or not it makes sense to move forward with a home equity loan, high DTI or not, will depend on your unique financial situation. 

When a home equity loan with high DTI is good idea

A home equity loan may be a good fit if: 

• You are comfortable with an additional, predictable monthly payment.
• You know exactly how much funds you need.
• You plan to invest the funds back into your home or into your financial goal. 

When to consider alternatives

A home equity loan may not be the best option for you if: 

• You’re unsure of how much funds you need. 
• Your monthly cash-flow will be strained by an additional payment. 
• You need your loan as quickly as possible. 

Alternatives to consider

If you’ve determined that a home equity loan is not an ideal fit, there are other options – both in terms of home equity financing and unsecured loans. Here are a few of our top alternatives to consider: 

Home equity investment 

This equity-based alternative to HELOCs and home equity loans is a great choice for homeowners with high DTI. 

• How it works – You get cash today in exchange for a share of your home’s future appreciation. There are no monthly payments. Instead, you repay with a one-time balloon payment before the end of the term, typically 10 or 30 years. 
• How much you can borrow – Up to $500k, depending on how much equity you have in your home. 
• Eligibility (why it may be a good option) – There are no income requirements, so your DTI is not a factor in determining your eligibility. Homeowners with credit challenges are also welcome – you can qualify with a score of 500+. Some (but not all) HEI companies work with investors and second homes. 
• Considerations – You will need plenty of home equity – more than a traditional home equity loan. You’ll also need an eligible property type and location.  

Personal loan

Although traditional personal loans come with strict DTI requirements – 36% or less – peer-to-peer lending can open the world of personal loans to a broader range of borrowers. 

• How it works – You get a lump sum in exchange for a monthly payment over a medium term, typically 3 to 5 years. 
• How much you can borrow – This varies by lender, although $50,000 is a frequent cut-off. 
• Eligibility (why it may be a good option) – Although most banks will require a DTI of under 36% for a personal loan, peer-to-peer lending companies have a wide range of requirements. This type of loan is not secured, so your home will not be at risk if you cannot make your payments. 
• Considerations - Unsecured products such as personal loans tend to have higher rates than secured ones like home equity loans. 

401(k) loan

If you have an eligible retirement plan, you may be able to lend yourself the funds you need. 

• How it works – You borrow funds from the one person who has the best incentive to lend you a hand – yourself. 401(k) loans are repaid with interest, just like any other loan, and they most often come with a 5-year term. 
• How much you can borrow – Up to $50,000 or half your 401(k) balance, whichever is lower.
• Eligibility (why it may be a good option) – If your employer’s 401(k) allows for loans, traditional financial markers such as DTI and credit score are typically not a part of the qualification criteria. 
• Considerations – Treating your retirement plan like a piggy bank today can lead to a serious retirement shortfall tomorrow. If you cannot repay your 401(k) within the term, you may also face tax penalties. 

HELOC

The HELOC (home equity line of credit) is the home equity loan’s more flexible sibling. 

• How it works – A HELOC works similarly to a credit card – just one that is backed by your home equity. There are two phases – a draw (5-10 years), during which you make interest-only payments, and a repayment period (10-20 years), during which you make payments towards the interest and principal.  HELOCs come with a variable rate. 
• How much you can borrow – Up to 80 to 85% of your home equity, with maximum draw amounts of $500k and beyond. 
• Eligibility (why it may be a good option) – HELOC eligibility is very similar to a home equity loan, but the closing costs tend to be cheaper and the monthly payments during the draw phase tend to be lower. 
• Considerations – HELOC payments change as the rate changes, and can be unpredictable. After you complete your draw phase, your payment will increase significantly, and you will no longer be able to withdraw additional money from your line of credit. 

Final thoughts

While a high DTI can make unlocking your home equity more challenging, you still have plenty of options. Point’s HEI comes with no income requirements, no monthly payments, and no need for perfect credit. Your DTI is not a factor in qualifying for an HEI. Prequalifying takes under 60 seconds – check your eligibility today.