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
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
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%.