Home Equity Loans: What Factors Lenders Consider
When a lender considers whether or not to approve your home equity loan application, he will compare the equity in your home against the loan amount you have requested. Usually, lenders are willing to offer home equity loans up to 80% of the equity amount, although it is not uncommon for some lenders to offer the full 100%. In fact, it is possible that a lender would even grant your loan request for an amount that is greater than your equity but would probably apply higher interest rates or shorter terms to compensate for the increased risk.
Lenders will offer a varying interest rate depending upon your credit score and other qualifiers but they still must comply with the rules set forth by Freddie Mac and Fannie Mae when it comes to risk factors. Since there is some leeway for individual lenders it is a good idea to carefully read and make sure you understand the stipulations, restrictions, clauses, rates, exclusions, and terms for the loan before you sign the dotted line. The rate and terms you are offered will depend upon your credit score, ability to repay the debt and your wages.
Before settling on any one loan, it is a good idea to shop around. Consider the amount you need to borrow. If it isn't a large amount, you might be better off with a credit line and if it is a large amount, you might be better off with a total refinance of your mortgage so you can cash out your equity. Also, bear in mind that you should understand the different types of financing. For example, it is usually better to opt for a fixed rate instead of being seduced by low initial variable rates. A fixed rate means your loan payment will be the same every month until your loan is paid off. A variable rate means your loan payment could rise along with inflation until you are unable to afford your payment in 5 or 10 years.
When it comes to applying for a home equity loan, the most important factor the lender will consider is the amount of the loan request as compared to the amount of your equity. Next, the lender will consider your credit score and income. Therefore, if you think you will be taking out a home equity loan, it is a good idea to get your credit cleaned up before you apply. Also, if you intend to change jobs, it would be best to apply for your loan before switching employment. You want your income and finances to look as stable as possible so the lender won't have an excuse to reject your home equity loan application.