With the mortgage rates at historic low and the housing market recovering from the crash, more people are thinking about accessing home equity or buying a home. Over the past few years, lenders are starting to ease their standards a little bit, so it is easier to get a home loan, but getting a loan is still quite hard. You still need to meet certain standards, and, even though lenders are a little more lenient, they are still more conservative than in the days before the crisis of 2008.
Here are some things to keep in mind as you apply for a home loan:
One of the first things that a lender will look for is a good and solid credit history. It doesn’t need to be perfect, but if you want the best interest rate on your loan you need a good score. You still need at least 720 to qualify for the best interest rate at some financial institutions. However, you can still get a decent rate if your score is in the 690 – 715 range. Making an effort to improve your credit score by paying down some of your credit card debt and making sure there aren’t errors in your credit report, can improve your chances of approval for a better interest rate on a home equity loan.
While the real estate bubble was still expanding, some lenders would agree to finance you for 125% of your home’s equity, reasoning that values would only go up. (Or that they could sell off your loan to someone else before anything bad happened.) Since that is now seen as financial folly, you need equity. Your equity is the amount of “ownership” you have in your home. If you have a home valued at $180,000, and you owe $130,000 on it, you only have $50,000 equity in your home, or about 28% equity.
The loan to value ratio represents the amount you owe on your home in relation to the value of your home. In the case of our example, the loan to value ratio is 72%, since you still owe 72% of your homes value. Most lenders like to keep the loan to value ration at right around 80%, so, in our example, the lender wouldn’t want you to owe more than $144,000 on your home. That means that you couldn’t borrow more than $14,000, unless you could find a lender willing to approve you for a high loan to value second mortgage.
Finally, your lender will want to know about your income. The first reason is that the lender wants to make sure that your debt to income ratio will be acceptable if you take on the additional debt of a home equity loan. Most lenders prefer it if your total debt payments amount to no more than 36% of your monthly income. If you make $4,500 a month, that means that the lender would be unlikely to approve an amount that resulted in your debt payments adding up to more than $1,620 each month.
Before you apply for a home equity, it’s a good idea to pay down some debt, and boost your credit score so that you are more likely to qualify for a home equity loan. You should also consider whether or not you have enough equity in your home to be considered.
Photo by lumaxart.
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