Is low income history a deal breaker for a home equity loan?

Discussion
1

I’m considering a home equity loan and would like to cash out less than 40% of my home’s equity. My house is valued at $325k, and I’m looking at a $125k loan. Over the past two years, my documented income was $38k and $48k, respectively, but my current total compensation has increased to around $120k. If I projected my income for 2024, it could be between $48k and $68k. Will my previous lower income impact my ability to secure a home equity loan, even though my current income is significantly higher?

2

The length of time you’ve been earning the higher income is crucial. Lenders usually prefer to average out incomes over 24 months, especially if it’s variable. They’ll also want to understand the reasons behind the significant increase.

3

Is your income primarily from salary, or does it include commissions or bonuses? This can affect how lenders calculate your average income.

4

Kyle said:
Is your income primarily from salary, or does it include commissions or bonuses? This can affect how lenders calculate your average income.

My earnings are based on hourly wages, which scale up with hours worked.

5

@Val
To qualify, you can consider the salary portion of your projected 2024 income, add the total commissions or bonuses from 2024 to 2023, and divide by 24 to get an average. This figure will represent your qualifying income.

6

@Val
Keep in mind that only your base salary counts towards loan qualification until you have been at your current job for two years.

7

It’s unusual for someone with a suddenly tripled income to seek an emergency fund. What’s the underlying need for this loan?

8

Jamie said:
It’s unusual for someone with a suddenly tripled income to seek an emergency fund. What’s the underlying need for this loan?

I’m not seeking an emergency fund; I have sufficient cash for my needs. My aim is to finance a purchase using home equity rather than depleting my cash reserves.

9

@Val
If you had significant savings, the need for a home equity loan might seem less crucial.

10

Arielle said:
@Val
If you had significant savings, the need for a home equity loan might seem less crucial.

My question was about leveraging equity for financial flexibility, not out of necessity. Is there a reason why this wouldn’t be a prudent choice?

11

You might still have options. If you can document and explain the recent income increase, lenders may consider it when evaluating your application. It’s best to get a pre-approval to understand what’s possible.