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Home Equity Loan Qualifying
Qualifying for a home equity loan is much like qualifying for your initial home loan. The lenders will use three main items to determine if you qualify for a home equity loan mortgage:
The home equity loan lenders will review these items to try and determine your ability to repay the loan. Lenders do not want to take a property, they simply want the repayment of the loan in a timely fashion.
Your credit history will be reviewed by the lender by obtaining the credit reports and credit scores from all three major bureau's: Transunion, Experian, Equifax. (Get a Free Credit Report from Transunion Online)
Lenders will look at the last two years of your credit history. What they are looking for is a timely repayment of bills, with no late payments. They are also reviewing your credit report to verify that there is no negative items such as:
- Collection Accounts
- Liens (State or Federal Tax Liens)
- Judgements
- Bankruptcies
- Charge off
It is important that your credit report that not have any erroneous information on it. If you have not checked your credit report in the last year, you can do so now by getting your free credit report here.
If there are negative items on your credit, this does not automatically disqualify you from a home equity loan but it may have an impact on the interest rate you will be charge. You should also have a loan officer review your options with you. Find out now what type of home equity loan you qualify for by applying now.
Aside than reviewing you overall credit profile, the lenders will also review your credit score.
Your Credit Score
Why do lenders look at your credit score? They do so because your credit score is a statistical analysis of your credit profile to determine the likelihood of your ability to repay the home equity loan on a timely basis.The higher the score, the more likely (statistically) you will pay the loan on time. The lower the score, the higher the risk for late payments (again, statistically).
Typically, you will need a credit score above 620 to qualify for a home equity loan. If you score is below that number, the loan may be considered a sub-prime loan due to the statistically higher risk of default. Lenders do have specific loan programs available for these types of loans.
The lenders will usually use the middle credit score (of the three bureaus) of the primary wage earner for qualifying purposes. If your credit scores are between 620 - 900 you should be able to obtain a home equity loan.
It is important that you do not disqualify yourself from being able to obtain a home equity loan, please be sure have a lender review your credit report with you to determine your credit qualifications.
Once your credit history has been reviewed, the lender will next look at income history for the last two years. They lender is looking for a stable or increasing income history for the last two years.
If you income has been stable or increasing, they will next review your current income to calculate your income to debt ratio's. Your income to debt ratios will help the lender determine your ability to repay the home equity loan. Your income to debt ratio's usually should not exceed 45 - 50%.
This income to debt calculation will be performed by the lender but is consists of the following:
Current mortgage payment plus future home equity loan payment.
- Divided by -
Monthly revolving liabilities not paid off by home equity loan.
Below is a list of the types of liabilities used in the calculation:
- Car Payments
- Credit Card Minimum Monthly Payments
- Student Loans / Personal Loans
- Legal Liabilities such as: Child Support, Alimony, Liens, Etc.
The lender will require the following documents from you to substantiate your income when you apply for a home equity loan:
- 1 month most recent paystubs
- Last two years W-2's and/or 1099's
- If self-employed or commissioned then will also need last two years Federal Tax Returns and a year to date Profit & Loss Statement.
Lastly, the lenders will review the security for the loan which is your home.
The security for a home equity loan lender is your property. All home equity loans are secured by a deed of trust which is recorded against your property.
In addition to your credit history and income, the current value of your home will determine how large of a home equity loan you can qualify for. Home equity loan lenders will lend up to 125% of the current value of your home.
Once you have applied for a home equity loan and it is determined that your credit and income is satisfactory, the lenders will request an appraisal (either full or drive by) to determine the value of your home. If the value is sufficient then you should be approved and will be ready to close on your home equity loan.
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