Applying for a Home Equity Loan

When applying for a home equity loan, lenders look at specific qualifications having to do with your credit worthiness before they will approve the loan and work out the terms. The better you are with these qualifications, the better your chances of being approved for a home equity loan and to get the maximum value for your loan. The three main qualifications lenders look at are:

• Your credit score
• Your income
• Your loan-to-value ratio or LTV ratio

Let's take an in depth look at each and how you can improve them to get the maximum value from your loan.

Your Credit Score

The biggest indicator to a lender of how much risk they are taking by extending you a loan is your credit score. Your credit score will help the lender decide if you will be approved for a loan, how much you will be charged in interest and fees, and the amount you can borrow. Your credit score is mainly affected by two things within your credit report: your credit history and your outstanding debt.

Your credit score is a number ranging from 300 to 850 that indicates your credit worthiness. A credit score of 620 or higher is what lenders are typically looking for when approving loans. Your credit history makes up 35-40% of that score. Your credit history is a report of how well you have paid money that you owe to creditors of all sorts. It is a history of on-time, late or missed payments, if your account has ever been sent to a collection agency, how much open credit you have currently, how much debt you currently have, how many times your credit has been checked recently, and if you have ever filed for bankruptcy. Your recent payment history is the most important aspect of your credit report when it comes to applying for a home equity loan. You should always ask your lender how your credit score is affecting your loan.

Your outstanding debt is any money you owe creditors such as credit cards, car loans, mortgages, or other loans and makes up 30% of your credit score. The lower your outstanding debt the better your chances for being approved for a loan are. If your outstanding debt is too high, most lenders won't consider you for a loan, and the ones that will are those that will charge you an excessive amount of interest. Most lenders have a maximum amount of outstanding debt they will not exceed, so be sure you are within their range before you apply.

Your Income

Lenders look closely at your income, your employment history, and how long you have been in your field of employment. They want to see how much of your income is going toward paying bills including the amount you would be paying on the home equity loan you are applying for. They want to see how the loan will affect your debt-to-income ratio. If your debt-to-income ratio is too high, they won't lend to you. Be prepared to show your lender proof of income in the form of W2's, tax returns, or other earnings estimates, or you can be sure you will be turned down for your home equity loan. Lenders look for low risk loans and if you can't prove that you can pay for it, they won't loan to you.

Your employment history also affects your credit worthiness. If you have a history of stability in your job, lenders will consider you a low risk borrower, whereas those who have a history of bouncing from job to job are considered high risk. What if you loose your job and are unable to make your loan payments? Lenders don't want to put themselves into a risky situation, so they consider your employment history carefully. They also consider how long you have been in your field of employment. If you have been there a while, you are at a much lower risk for changing employment or of going back to school, which always brings financial pressure to families.

Your Loan-to-Value Ratio or LTV Ratio

The third qualification lenders look at when seeing if they will approve your home equity loan is your loan-to-value ratio or LTV ratio. Your LTV ratio is determined by adding up how much you owe on your property including the loan you are applying for and dividing it by the fair-market value of your home. If the ratio is 80% or less, the lender is more likely to approve your loan. If the ratio is between 80% and 90%, there is still a good chance you'll be approved, but it will be at a higher interest rate and fees. Some lenders will even approve your home equity loan up to a 125% LTV ratio, though it isn't recommended you apply for an amount that would make your LTV ratio that high as it significantly increases your risk for loosing your home. You'll only get that high of a loan amount, though if you can afford the monthly payment or you have agreed to a balloon payment at the end of the loan term.

When Closing the Deal

When you are closing the deal on your home equity loan there are two things you should be aware of. One is that, according to the truth in lending act, you should be provided with disclosure documents that tell you the terms and costs of the loan including the APR, points, fees and closing costs, the amount being borrowed, and special terms such as balloon payments, and pre-payment penalties. This prevents changes in your loan terms that you are unaware of.

The other thing you should be aware of when closing on your home equity loan is that by law you have a right to cancel your loan for any reason within three days of signing the loan documents. The lender should not give you any money until the three days are up and if you decide to cancel you need to do so in writing and deliver it to your lender before midnight on the third day.

Ways to Improve your Chances for Approval and Maximizing your Loan

So, lenders are looking at your credit score, your income, and your LTV ratio for the most part to determine whether you qualify for a home equity loan or not. Here are some things you can do to improve your chances for being approved, getting the best loan, and getting the maximum value for it:

• Monitor and fix your credit report: Your credit score is a huge factor on whether or not you will be approved for a home equity loan and the terms you will receive on the loan if you approved. Monitor your credit report for errors and correct them to improve your credit score. You can dispute errors on your credit report and the reporting agencies will inquire into the dispute and correct it if possible. You can also add notes to your credit report to explain late or missed payments, etc.
• Consolidate your debt to lower your debt-to-income ratio: Another thing you can do to improve your chances for approval and to get the best terms possible on your home equity loan is to consolidate your debt to one monthly payment that lowers your debt-to-income ratio. This frees up your income to take on other obligations like a home equity loan. Consolidating debt can reflect badly on your credit report, but does not have to if done correctly.
• Shop around: When looking for a loan, you should always shop around. There are a lot of mediocre deals out there and there are some gems that you can find. If you shop around you can guarantee yourself the best interest rate and terms possible. There are professional agencies that can assist you in finding the best loan you can get for a small fee. If you don't want to doe the work of looking for yourself, a loan finding agency or website can assist you.
• Compare real offers: When you are shopping around for your home equity loan, go through the entire approval process to make sure you are comparing loans that are legitimate offers rather than just advertisements. You won't always qualify for what a lender has advertised and sometimes they don't advertise the really good deals. Some lenders are easier to negotiate with others, which you should also take into consideration when you are shopping for your home equity loan. When you are comparing loans, be sure they have similar terms and amounts or you won't get the information you are looking for. Compare apples to apples and make sure you are comparing real offers rather than just what is advertised.