Qualifying for a Home Equity Loan
Written by Daphne Tai, Kasey Ng   


Once you decide to get a home equity loan and choose a lender, you must prove that you qualify for a loan. Here are a few of the things that the lender will be looking for:
  • Your credit history,
  • Your income, and
  • The loan-to-value ratio.

Credit History

Credit Reports, Credit Scores
When borrowing money, your creditworthiness should always be the most important thing that the lenders consider. Your credit history is a perfect reference for the lender to learn what kind of borrower you are. All of the information about the amount of debt you have, and whether you pay your bills on time, are reported to credit bureaus, who compile these factors into a file called a credit report. After they collect and analyze your records, they calculate a credit score, or a number between 300 and 850, which ranks your creditworthiness against that of your peers.

FICO 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. Therefore, having a score higher than 700 is a very good sign for lenders, and tells them that your financial background is stable. Having a score lower than 600 gives the lenders a warning sign, which indicates high risks. This could lead lenders to charge you higher rates or even disapprove your loan request.

You, in a Folder
In your credit report, you can find your identifying information, your credit history, public records, and lists of recent credit inquiries. Lenders will take a look at all these factors and then decide whether they want to lend money to you.


Income

Lenders want to know how much you make and how long you have been at your job. For example, if two people have the same credit score and pay same percentage of down payment, lenders will choose to offer loan to the person who earn higher income and work in a stable job because he or she is less likely to lose his or her source of income and default.

Debt to Income Ratio
To access your financial status, lenders will measure your “debt-to-income” ratio. It calculates the amount of your total gross income that will go into all of your other obligations, such as your mortgage, credit card bills, other loans, and debts. The ratio indicates how likely the borrowers will default on the loans. The lower the ratio, the higher chance to obtain the loan. The benchmark for this measure is usually no greater than 36% of your gross income. This measure can be treated like Total Monthly Debt Payment. Usually you need to show your lender proofs of income, such as W-2s, tax returns and other earning statements.


Loan to Value Ratio

Another thing that the lenders will be looking for is “loan-to-value ratio” (LTV). This is the ratio between what you owe on your home and what its worth. The lenders are more likely to give the loan if the property has low LTV. Calculating the LTV is very simple: it is 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%. However, calculating the LTV ratio can be complicated if the home’s value has changed since you bought it. In this case, the lender will get an appraisal or estimate of the home’s current fair market value and calculate the new LTV ratio.

Usually, equity lenders want to keep your total loan-to-value ratio at 80 percent or less. For example, if you owe $100,000 on a house, and the value of the house is $200,000. You could get an equity loan up to $60,000. A loan that sizes would increase your total housing debt to $160,000, which is 80% of the home’s value.
Last Updated on Wednesday, 16 February 2011 13:41