What Home Equity Lenders Are Looking For
If you are planning to borrow against your home equity, your lender is going to look at several different factors to determine whether you qualify. The main thing they’re going to look at is how credit worthy you are. Your credit history will also have a big impact on what interest rates you’ll be offered and how much you’ll be able to borrow. And last but not least, your income will be considered.
Your Credit History
The three main credit bureaus Experian, Trans Union, and Equifax, collect debt and payment information about you over time. The information in these reports will be used by the lender to determine how much debt you currently have in the maximum payments are likely to be able to make with your current income. Your credit score will be the first thing they look at. This is also called the FICO Score.
It is important that you obtain your credit reports prior to applying for any home equity loan or line of credit. You want to be sure there is no damaging information on the reports that might get you declined for your loan.
Your Total Monthly Income
Home-equity lenders are going to want to know how much you make on a monthly basis and how long you’ve been with your current employer. They look at other things as well like credit card bills, car payments, and other monthly debt obligations. You should be ready to provide proof of any income and may be required to submit tax returns and other earnings related documents in order to get the best chance of being approved.
Your Loan To Value Ratio
This number is a ratio between what your home is worth and how much you owe on it. If your house is $1 million and you still owe 800,000 on it, you’re ratio will be 80%. This ratio becomes more complicated to determine over time because the price of your home is fluctuating month by month.
A good benchmark to go by is using this 80%. Most lenders are going to want you to have a ratio of 80% or less. This of course depends on the lender some will go higher on the ratio and, in some cases, action provides you with a loan that exceeds the value of your house. These are also known as high LTV loans. You’re probably going to pay a higher rate on these loans and you will likely need to live in an area where home appreciation is steady.
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