Equity represents your ownership stake in a piece of property. Generally, when people talk about tapping their equity they are talking about the equity they have in their home. Depending on several factors, including your income and credit score, you can access up to 100 percent of the equity in your home when you take out a mortgage or home loan.
Lenders check your credit score when you apply for a loan and on a home loan you normally need to have a credit score of at least 620 in order to qualify for a loan. Credit scores below 620 are below average and referred to as subprime. Some lenders write loans for people who have subprime scores but these loans, where available, have very high interest rates. Most lenders only enable people with very high credit scores to cash out 100 percent of their home equity because high loan-to-value loans expose lenders to high levels of risk because home prices can fall over time.
Loan To Value
For a purchase mortgage you can finance up to 95 percent of the property value with a conventional mortgage, while you can finance up to 96.5 percent if you get a loan backed by the Federal Housing Administration (FHA). The same maximums apply to a refinance if you use the loan to pay off your existing mortgage, but for a cash out refinance mortgage, your loan-to-value (LTV) ratio usually cannot exceed 80 percent of the property value. For home equity loans and lines of credit, maximum loan amounts vary, but some banks cap line limits at 70 percent LTV, while others let you extract 100 percent of your equity. However, some lenders allow people whose mortgage debt exceeds their home's value to refinance that debt with loans that have LTV ratios of up to 125 percent.
Your debt-to-income ratio plays an important part in the loan approval process, as you cannot extract any equity from your home if you cannot afford to make the monthly loan payments. The debt part of your DTI ratio includes your monthly credit payments such as your mortgage and car loan. Depending on the type of loan for which you apply, your lender may cap your DTI ratio at between 30 and 50 percent. Therefore, having very little income and very high debt levels could preclude you from tapping your home equity.
You typically can borrow 100 percent of the equity you have in your car, although your lender may limit the LTV if you are financing a used vehicle. For cash-secured loans, you can borrow 100 percent of the money you use to secure the loan, because these loans offer no risk to the lender.
You can also borrow equity or money that you own from your 401k account. As of 2011, you can borrow up to 50 percent of your vested balance if the plan administrator offers a loan option. The vested balance represents the portion of the account you own as opposed to funds your employer put in the account that do not yet belong to you.