To qualify for a home equity line of credit, you’ll need more than equity in your property. Your current income level, credit score, and credit history all play a part. A lender may deny your HELOC application because of your income level or a red flag on your credit report.
While low income and poor credit could be roadblocks, there are ways to boost your HELOC approval chances. Here, we’ll cover how to get a home equity line of credit by applying with a co-applicant.
As a homeowner, your house is likely one of your most valuable assets. The equity built up in your home over time represents a significant financial resource that can be tapped into to help you achieve your goals. However, many homeowners find that poor credit or low income prevents them from qualifying for a home equity loan on their own. This is where bringing on a cosigner can open new doors.
In this comprehensive guide, we’ll walk you through everything you need to know about getting a home equity loan with a cosigner We’ll cover the benefits and risks, alternatives to explore, tips for qualifying, and steps for applying By the end, you’ll have the knowledge to make an informed decision on whether a home equity loan with a cosigner is the right financing option for you.
What is a Home Equity Loan?
Before diving into cosigning, let’s quickly review what a home equity loan is. A home equity loan allows you to borrow against the equity that has built up in your home. It provides you with a lump sum of cash upfront, which you repay in fixed monthly installments over a set repayment term, usually 5-30 years.
Home equity loans have fixed interest rates and origination fees. The loan amount and terms you qualify for depend on factors like your home equity, credit score, and debt-to-income ratio. Common uses for home equity loan funds include:
- Home improvements and renovations
- Paying off higher interest debt
- Major purchases like a car, boat, or college tuition
How Much Can You Borrow?
The amount you can borrow depends on how much equity you have Equity is calculated by taking your home’s market value and subtracting any mortgage debt still owed on it
For example
- Home Value: $300,000
- Mortgage Debt: $180,000
- Home Equity: $300,000 – $180,000 = $120,000
Lenders typically allow you to borrow up to 85% of your home’s value. So in this example, you could qualify for around $255,000 ($300,000 * 85%) with a home equity loan.
Benefits of a Cosigner for Home Equity Loans
Bringing on a cosigner for your home equity loan application can provide significant benefits, especially if you have less-than-perfect credit or income. A cosigner agrees to be equally responsible for repaying the loan. Here are some key advantages of having a cosigner:
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Improved approval odds – Lenders view cosigned loans as less risky, since there are two people committed to repaying the debt. This can help you qualify if your individual credit or income is lacking.
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Lower interest rates – Interest rates are primarily based on credit scores. A cosigner with excellent credit can help you secure a lower rate.
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Higher loan amounts – With a cosigner that boosts your overall creditworthiness, you may be approved to borrow a larger percentage of your home’s equity.
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Lower fees – Strong applicant profiles allow lenders to reduce or waive origination fees. A cosigner can help you avoid thousands in upfront costs.
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Faster process – Cosigned applications generally require less scrutiny and documentation, speeding up approval.
For homeowners with less-than-stellar finances, bringing on a cosigner can mean the difference between qualifying or not qualifying at all.
Risks of Cosigning a Home Equity Loan
While beneficial in many ways, cosigning a loan is not a decision to be made lightly. It carries significant risks and responsibility for the cosigner that must be considered upfront.
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Equal responsibility for repayment – If you fail to make payments, the cosigner becomes responsible for repaying the full loan amount. Their finances and credit score are now at risk.
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Impact on cosigner’s credit – Any missed or late payments will damage both your credit and the cosigner’s. Their debts and credit utilization will increase.
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Potential strain on relationship – Financial obligations between family or friends can damage relationships if not managed carefully. Defaulting could seriously impact your tie with the cosigner.
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Foreclosure risk – If neither party makes payments, the lender can foreclose on the home, leaving both of you without the property.
The cosigner is putting their own financial health on the line to help you. Be certain it is someone willing and able to take on such responsibility before moving forward.
What Makes a Good Cosigner?
Not just anyone can be an effective cosigner on your home equity loan. A cosigner’s financial profile directly impacts the loan terms you’ll be offered, so you want to choose wisely.
Here are the attributes that make a good cosigner:
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Excellent credit score (700+) – The higher their score, the better rates and terms you’ll be offered.
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Low debt-to-income ratio – A ratio below 40% shows lenders they can comfortably handle the added loan payment.
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Sufficient income – Stable income that covers their own bills and debts is needed to provide extra assurance.
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Strong credit history – A long credit history free of late payments, defaults, and bankruptcy filings minimizes risk.
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Willingness to cosign – They must fully understand the risk and be comfortable taking it on to help you.
A family member like a parent, sibling, or relative is often a good first choice. Otherwise, close friends may be willing to take on the responsibility.
Alternatives to Home Equity Loans with a Cosigner
While advantageous in many cases, a home equity loan with a cosigner is not the only financing option available. Here are a few alternatives worth considering:
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Cash-out refinance – This replaces your mortgage with a new higher balance loan to tap equity, often with better rates than home equity loans.
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HELOC – A home equity line of credit offers flexible borrowing that may be easier to qualify for individually.
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FHA 203(k) loan – This specialized mortgage finances home purchases and renovations in a single loan for borrowers with poorer credit.
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Reverse mortgage – An option for seniors (62+) that provides tax-free income from home equity without needing repayment during your lifetime.
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Personal loans – For smaller amounts, an unsecured personal loan may provide financing without putting your home at risk.
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Credit cards – Similarly, credit cards allow you to borrow smaller amounts for routine expenses and bills if paid off promptly.
Be sure to compare rates and terms to find the most affordable financing option that aligns with your borrowing needs.
Tips for Qualifying for a Home Equity Loan with a Cosigner
If you’ve weighed the risks and benefits and decided a home equity loan with a cosigner is the right fit, here are some tips to boost your chances of approval:
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Shop lenders – Compare quotes from multiple lenders to find the best rates/fees for your scenario. Online lenders often have more flexible cosigner criteria.
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Pay down existing debts – Reduce credit card balances and other debts to lower your DTI ahead of applying.
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Check your credit – Review credit reports for errors that could be fixed to improve your score.
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Add your cosigner early – Involving them from the initial application increases the odds of acceptance.
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Provide documentation – Have paystubs, tax returns, and bank statements ready to verify income and assets.
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Pick conservative terms – Opt for a loan amount and repayment term you can comfortably handle.
Taking these steps demonstrates to lenders you and your cosigner will be able to manage the new loan obligation responsibly.
Applying for a Home Equity Loan with Cosigner
Once you’ve found a willing cosigner, follow this step-by-step process to apply for a home equity loan together:
1. Review Loan Options
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Research interest rates, fees, loan-to-value ratios, and cosigner release options from multiple lenders. Local banks, credit unions, online lenders, and mortgage brokers are all options.
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Consider both fixed and variable rate loans, and choose the term length that aligns with your goals. 3 to 5 years for a kitchen remodel, up to 20 years for debt consolidation.
2. Gather Required Documents
- Home appraisal or valuation – verifies current home equity
- Identification – driver’s license or passport for both cosigner and borrower
- Income verification – recent paystubs, W-2s, tax returns
- Employment information – letters from employers, length of employment
- Bank statements – shows regular income deposits and balances
3. Complete Loan Application
- Provide personal details, income, debts, assets, and reason for borrowing
- Cosigner must complete their information and e-sign forms
- Authenticate identity by answering security questions
4. Get Appraisal and Home Inspection
- If an appraisal wasn’t done already, the lender will order a home valuation
- May require a home inspection for renovations or if over 5-10 years ol
How to Get a Home Equity Line of Credit with a Co-Applicant
Your co-applicant, sometimes referred to as the co-borrower, is a trusted person who’ll share the liability for repaying your home equity line of credit. The co-applicant assumes equal ownership, payment and overall responsibility for the loan payments.
When considering how to get a home equity line of credit, you might seek out a reliable co-applicant with a solid credit history or a higher income than yours to improve your approval chances. Often, people choose to co-borrow with a partner or spouse to qualify for a larger loan than either one of the individuals could get on their own.
The Benefits of a Co-Applicant on a HELOC
A co-applicant with good credit could improve approval chances for a primary borrower with shakier. A co-applicant may also help secure a lower interest rate. Not only that, you might be able to access more equity in your home by applying for a HELOC with a co-applicant.
If you’re thinking about how to get a home equity line of credit to consolidate debt or pay for home renovations, consider adding a trusted co-applicant to your HELOC application to increase your approval chances.
Eligibility for a home equity loan or HELOC up to the maximum amount shown depends on the information provided in the home equity application. Depending on the lender, loans above $250,000 may require an in-home appraisal and title insurance. Depending on the lender, HELOC borrowers must take an initial draw of the greater of $50,000 or 50% of the total line amount at closing, except in Texas, where the minimum initial draw at closing is $60,000; subsequent HELOC draws are prohibited during the first 90 days following closing; after the first 90 days following closing, subsequent HELOC draws must be $1,000, or more, except in Texas, where the minimum subsequent draw amount is $4,000.
The amount of time it takes to get funds varies. It is measured from the time the lender receives all documents requested from the applicant and depends on the time it takes to verify information provided in the application. The time period calculation to get funds is based on the first 4 months of 2023 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period.
For Texas home equity products through Prosper, funds cannot be used to pay (in part or in full) non-homestead debt at account opening.
Depending on the lender, qualified home equity applicants may borrow up to 80% – 95% of their primary home’s value and up to 80% – 90% of the value of a second home. In Texas, qualified applicants may borrow up to 80% of their home’s value. HELoan applicants may borrow up to 85% of the value of an investment property (not available for HELOCs).
Home equity products through Prosper may not be available in all states.
All home equity products are underwritten and issued by Prosper’s Lending Partners. Please see your agreement for details.
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