What a home equity lender looks for: Tips for loan approval
If you apply for a home loan, the home equity lender will check your credit record to find out about the type of borrower you are. All home loan lenders want to know about how much money you owe and whether you make your payments on time. An equity lender will also want to find out whether you have a record of bankruptcy, repossession, judgments or delinquent accounts. If you have a low credit score, an equity lender may offset the risk by raising the rate of interest or reducing the loan amount.
Factors like long-term job stability and a low loan-to-value ratio can compensate for bad credit issues. If you have a good credit score, home equity lenders will offer you a higher loan-to-value ratio, a better interest rate and a higher loan amount. A loan-to-value ratio expresses the amount of the first mortgage lien, as a percentage of the total appraised value of a property. Credit problems like late loan payments, caused by situations like a job layoff or illness can be explained to home loan lenders. A satisfactory explanation may convince an equity lender to give you a loan, even if you have bad credit. A home equity lender will want to know about how long you have been working for your current employer and how long you have been in the same line of work.
If you have been changing jobs frequently and have been changing you line of work, you may be considered a bad credit risk by home loan lenders. Job stability is an important consideration for granting a loan and home loan lenders prefer to deal with people who have been in the same job or line of work for at least two years.To qualify for a loan, your income-to-debt ratio must be within the acceptable limits that are prescribed for specific home equity loan programs. The total income that is taken into account by home equity lenders for the debt calculation depends on whether you earn a salary or wages or if you are self employed. Salary or wages are taken on a monthly basis and the average bonuses and overtime over the last two years are taken into account by home equity lenders. In the case of self employed people, home loan lenders take the average net income on the schedule C for the last two years into account. Other income may not be taken into account by home equity lenders, depending on the history of the income and how long it is likely to continue. If you have a part-time job, you must have had it for at least two years, for it to be included by home equity lenders.
The decision of the home equity lender about approving the loan and about the interest rate also depends on the ratio of the equity relative to the value of the home you want to buy. Some of the home equity lenders will not lend you anything in excess of 80% of the value, while other home loan lenders will go as high as 125% of the value of the home. The U.S Department of Housing and Urban Development (HUD) advises prospective borrowers to obtain information about mortgages in writing from several home equity lenders. Ask them to submit offers for the same type of loan, loan amount and loan term, so you can compare the offers with ease
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