Lenders
will look at many factors when deciding
whether or not to approve your
home equity
loan. Some of these factors include:
Credit
History
Mortgage
lenders will look at your past credit
history to help them determine how much of a
risk they are taking by lending you money.
It is therefore imperative that you take
care of your credit, because it will become
an important factor in determining whether
you will be able to obtain a loan and the
interest rate at which you can secure it.
Bad credit – such as late payments,
repossessions and delinquent accounts –
remain in your credit history for seven
years, while bankruptcy remains on your
record for ten years.
Upon
analyzing your credit history, you will be
given a credit score. These scores generally
take into account such factors as:
-
Any public records
pertaining to your credit -
a search of the public
records will turn up any signs of past
declarations of bankruptcy, delinquent
loans, lawsuits, or judgments.
-
Outstanding balances -
what are your outstanding
balances on other loans that you owe
money to? If it exceeds 80 percent of
your available credit limit, you will be
categorized as a high risk borrower.
-
The age of open
delinquent accounts -
another sign that you are
a high risk borrower is if any of your
accounts have been or are currently 60
or more days delinquent.
-
If there have been any
recent borrow generated credit inquires
-
This is usually a sign
that you are having credit problems, and
are looking for new loans or credit
cards to pay off other outstanding
debts.
The
better your credit score, the more likely
you will be approved for a loan. Even if you
have bad credit, you may still be able to
obtain a loan, but you may be required to
pay a higher interest rate.
Source of income
Lenders
will also look at several factors relating
to earning, including:
-
Your salary or wages from
a job
-
Self employment income if
you are self employed
-
How long you have been at
your current job
-
How long you have been in
your particular field
-
Unearned income - the
amount and sources are important.
Other factors lenders
may look at include:
Debt-to-income ratio -
This is a measure of how much of your
monthly income you spend on expenses, and
includes housing expense, credit card bills,
car payments and other financial
obligations. Lenders generally expect you to
spend no more than 33 to 40 percent of your
monthly income on expenses.
Loan-to-value (LTV) ratio -
The LTV gives lenders a measure of how risky
a loan might be, and is calculated as the
loan amount divided by the property's
appraised value.
Example:
If you're borrowing $150,000 to buy a home
with an appraised value of $200,000, the
loan-to-value ratio is 75 percent.
Generally, the better your credit, the
higher the LTV ratio a lender will allow.
That is why lenders will look more favorably
upon your application if you make a larger
down payment, because it will lower your LTV
ratio, and thus lower the odds that you will
default on your loan since you have more
invested.
How to
calculate the LTV ratio for a
home equity
loan?
Example:
If your house now has a market value of
$150,000, and your first
mortgage
has a
principal balance of $50,000, then your
equity is $100,000. If you want to borrow
$40,000 against that property, then you
combine that with what you owe ($50,000),
leaving you with a total
debt of $90,000. To
calculate your LTV ratio, you simply divide
your loan amount ($90,000) by your home's
current value ($150,000) to get a value of
60 percent.
What you plan to do
with the loan
You
generally are not required to disclose this
information, but lenders will usually ask,
and it will likely be a factor in their
decision of whether or not to make you the
loan. If you are using the loan to
consolidate other
debts, lenders will
usually view this favorably, as you will
have more money to pay off your
home equity
loan if you are not burdened by other bills.
Documentation
Lenders
will generally require proof of:
-
Federal tax returns from
the previous two years.
-
W-2 forms from the
previous two years.
-
Recent paycheck stubs.
-
The name and address of
your employer, as well as your
year-to-date earnings.
-
Documents to show other
sources of income, which might include a
second job, overtime, commissions and
bonuses, interest and dividend income,
Social Security payments, VA and
retirement funds, alimony, child
support, etc.
-
A complete list of your
creditors, such as credit cards, student
loans, car payments, etc... along with
minimum monthly payments and the
balances for each.
-
Investment records
including mutual fund statements, real
estate and automobile titles, stock
certificates and any other investments
or assets.
-
Canceled checks showing
your monthly
mortgage payment.
Mortgage Glossary1
