Home Mortgage Loans

Qualify for Mortgage or Home Equity Loan

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When applying for a mortgage or home equity loan , one of the first things a lender will look at is your credit, which shows what kind of borrower you are, how much you owe, do you pay on time, if you've had a bankruptcy, judgment, repossession, or delinquent accounts.

Compensating factors can offset bad credit issues when processing a home equity loan. For example, a lower loan to value, or long term job stability are considered to be strong points. 

A good credit score allows the lender to offer a higher loan to value, bigger loan amount, and a better rate. A lower score means the lender may offset their risk by reducing the maximum loan amount, or raising the interest rate.

A good written explanation for credit problems can make a difference in getting a home equity loan. Home equity lenders know that a temporary situation can cause late loan payments, such as, an illness that prevented you from working, or a job lay off that created a gap in your employment.

Job stability is important, and is determined by how long you have been with your current employer, or how long you have been in the same type of work. A borrower that has changed jobs frequently, especially in different fields of employment, will be considered a higher financing risk. Lenders like to see a minimum of two years in the same job, or the same line of work.

Your ratio of income to debt must be within the allowable limits, depending on the specific home equity loan program. The total income used for the debt ratio depends on the source. Salary or wages are figured on a monthly basis, while overtime or bonuses will be averaged for the last two years. For self-employed borrowers, the net income on the schedule C will be averaged for the last two years. Other income may, or may not be included, depending the history of the income and how long it will continue. For example, a part-time job needs a two year history.

The loan to value also influences the home equity loan decision. The percentage of equity relative to the value of your home is an important factor for loan approval and the interest rate. Some lenders have a maximum loan to value of 80%, while others may lend up to 100%.