5 Things Lenders Look At When You Apply for a Home Equity Loan
Before you start the application process for your home equity loan, it is helpful to know what lenders look for in potential borrowers. With this knowledge you can get your documents in order before you apply. This will ensure that you get the best loan possible.
Here are five things that lenders will examine when considering you as a home equity loan borrower:
1. Your credit history. Lenders will look into your credit history, which is a record of your past financial behavior, in order to determine the likelihood that you will responsibly make your loan payments in the future. Your credit history is contained in a credit report that details such things as your credit card history, the amount of outstanding debt you have, the type of credit in use, the length of your credit history, and the amount of credit you use as compared to the amount that is available to you (referred to as your qualifying ratio). Your credit history and report also include your credit score, which is a number ranging from 300 to 850 and based on the aforementioned aspects of your borrowing record. Therefore, the details included in your credit report are represented by one number, in the form of your credit score. When you apply for a home equity loan, the lender will use your credit score as a guide to determine whether or not you are a credit risk. Therefore, be sure to maintain a good credit score, so that you will be more likely to receive a loan with a lower down payment and lower mortgage rates.
2. Your source of income. In addition to your credit habits, lenders also like to know about the source and stability of your income. They know that the details of your situation in this area are a major factor in your ability to keep up with your monthly loan payments. They want to know such things as whether or not you are self-employed, and how long you have been working in your current field and at your current job.
3. Your debt-to-income ratio. This is a measure of how much of your monthly income goes to paying off debt, such as your mortgage, credit card bills, and car payments. Most people are expected to have a debt-to-income ratio between 25% and 50%. The less debt you have, the more likely it is that you will be offered a good home equity loan, because it is more likely that you will be able to pay your bills on time.
4. Loan-to-value (LTV) ratio. When you divide the sum of the amount you owe on your mortgage and the amount of your home’s equity that you want to borrow by the appraised market value of your home, the result is the loan-to-value ratio, or LTV ratio, for a home equity loan (it is calculated differently for a traditional mortgage).
For example, if your house has a market value of $200,000, and your first mortgage has a balance of $50,000, then your equity is $150,000. Then let’s say you want to borrow $50,000 against that equity. You add that amount to the $50,000 of your mortgage balance to get $100,000, which is your total debt. Dividing $100,000 by the $200,000 that your home is worth, you get an LTV ratio of 50 percent.
Typically, the better your credit, the more money a lender will let you borrow, and a higher LTV ratio they will allow. LTV caps are usually at 80%, but some lenders will give out loans of 100% or more loan-to-value, which means that they are letting you borrow more than what your house is worth. Be careful though - there are risks involved with high-LTV loans.
5. The purpose for the loan. Even though you are not required to share your intended purpose for getting a home equity loan, it is still a question that lenders will usually ask.
Source: Informa Research Services