Qualifying for a Home Equity Line of Credit
Written by Daphne Tai, Kristina Lee   


So you’ve decide to get a home equity line of credit and have chosen a lender. Now, there are couple things that the lender will be looking for:
  • Significant equity in the first mortgage
  • Low debt-to-income ratio
  • High credit score
  • Solid employment history
The underwriter is the person who reads over your HELOC paperwork and decides whether or not to award you a loan. And usually these four things are the benchmarks that lenders will be looking for.

Equity
First of all, the underwriter will compare your home’s current appraisal with the amount of money you owe on your first mortgage. Since the credit limit is mainly based on the amount of equity in your property, most lenders want borrowers to have 80% or less loan-to-value on their home. This is the ratio between what you owe on your home and what its worth. Calculating the LTV is very simple: the mortgage amount divided by the home’s price. For example, if your house is worth $100,000 and you still owe $60,000, then your LTV ratio is 60%.

Debt Vs. Income
The second thing that lenders consider is your debt-to-income ratio. Even if you have a large amount of equity in your house, if your debt is twice your income, you will not be able to pay their loan back. All lenders want to make sure you will be able to afford the payments on your HELOC; the underwriter will compare your monthly debts to your monthly income. When you add your mortgage payment, potential HELOC payment, loan interest payment, property taxes, homeowner’s insurance, and mortgage insurance, the monthly total should not be more than 28% of your pre-tax income. And when you include all these housing-related expenses to your other financial obligations, such as credit card payments, auto loans, student loans, child support, etc, the total shouldn’t be more than 36%.

Credit Score
When lenders talk about "your score," they usually mean the FICO® score developed by Fair Isaac Corporation. It is today's most commonly used scoring system. FICO scores range from 300 to 850, and most people score in the 600s and 700s. If you have an extremely low score (below 500), you may not qualify for the loan. And if you have an excellent credit score (above 700), you should qualify for the best rates and terms. To qualify for the prime interest rate, you should have a credit score of 620 or higher.

Employment
The lenders also care about your employment history. They want to make sure you will continue to have a steady income throughout the life of the loan. The lenders will look over your W-2 forms, double check your pay stub, and verify your current employment status. You may be asked to provide additional employment information if you have been employed in your industry for less than 2 years.



 
Last Updated on Wednesday, 16 February 2011 13:41