What's Needed to Qualify

Key Qaulifying Criteria

Lenders Use Several Criteria to qualify an applicant for home equity financing. The most important criteria include:

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needed to qualify

The Home Appraisal

Lenders will not extend an equity line amount that exceeds the value of your home

Since a home equity is secured in a 2nd position by the value of your home, lenders will use your home value to determine how much loan amount that you can qualify for.

Regardless of what you paid for the home, lenders would be taking a sizable risk if you defaulted on the loan.

That is why lenders complete a market valuation or a home appraisal before they qualify any home equity amount. The appraisal must be comparable with similar homes in the surrounding neighborhood.

 

Most lenders qualify equity line amounts using a Long-to-Value (LTV) calculation

Which means that they will underwrite a loan at the LTV percentage of the appraised or market value of the home minus any amount that you still owe on your first mortgage and/or 2nd and 3rd mortgages.

This is calculated by taking:

  • Property Value
  • (times) % LTV
  • (minus) Mortgage Balance

 

The LTV rule protects the bank in the event of non-payment or market declines. The lower the LTV percentage, the less risk that bank will have to take translating into best rate and terms.

 

That is why the value of your home is an important component lenders use to qualify you for a loan amount

We have more information about market values and LTV:
estimate your home market value
use our LTV calculator to estimate your qualifying amount

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needed to qualify

Your Credit Rating

Your credit report is used by banks and other lending institutions to determine your credit worthiness.

The report lists any payment delinquencies that you may have had over the past three years.

While information regarding your credit habits for the last three years appears on your credit report, no adverse credit information, with the exception for bankruptcy, may be kept on file for more than seven years.

 

The report can be a factor in a lending institution's decision to approve or decline your equity line application.

You should review your credit report for any errors before applying for a equity line:

see checking credit report


Lending institutions review the following information from your credit report to determine your creditworthiness:

— your current outstanding debt
— number of times you've applied for credit
— kind of credit you have taken out in the past
— late payments
— over extension of your credit lines
— liens
— garnishments
— bankruptcy

 

You need a credit history of at least one year to ensure a good credit report.

A credit score determines the rate the lender may charge you. The credit score estimates your ability to repay a loan as evidenced by your credit history.

Lenders will sometimes give you a better rate based on a good credit report.

Further, a lending institution is less likely to be concerned over an occasional late payment if you have a good credit report rather than a fair credit report.

 

Establishing a good credit report can payoff in lower rates and better loan management.

For more information: link to our affiliated credit module for credit report information, repair, and management:

links to our credit management center at: SayEducate.com
credit reporting module

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needed to qualify

Your Capacity to Repay (Income Ratios)

Your capacity to repay the equity line is an important factor for lending institutions to qualify an applicant for financing.

If capacity ratios are too high, you will need to change one of the following parameters in order to qualify for equity financing:

  • reduce your borrowed amount
  • increase your LTV position
  • increase your income
  • pay off outstanding debts

 

Lenders use two debt ratios

1: The "HOUSING ratio":
calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

  • current mortgage loan payment on your home including interest and principal
  • real estate taxes
  • hazardous insurance
  • private Mortgage Insurance, if any
  • other mortgage related insurance
  • homeowner's association dues
  • ground keeping fees
  • property leases
  • other special assessments and financing

 

Monthly income includes the following:

  • employment income
  • overtime bonuses and commissions
  • net self employment income
  • alimony, child support and income from public assistance
  • social security, retirement, and VA benefits
  • workman's compensation or permanent disability payments
  • interest and dividend income
  • income from trust, partnerships, etc.
  • net rental income

 

2: The "DEBT ratio":
calculated by dividing monthly debt payments and other financing obligations by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What debt payments are includes:

  • housing debt payment (from above)
  • auto and other transportation loan payments
  • student debt payments
  • secured and unsecured loan payments
  • credit card payments
  • credit line payments (home equity)
  • alimony and child support payments
  • tax lien payments
  • other debt obligations
How Much Debt

The debt-to-income ratio is calculated by:

dividing your fixed monthly debt expenses by your gross monthly income.

As a basic rule, you should live within the following percentages:

monthly housing debt expenses including taxes, insurance: 25-28%
other credit obligations (credit cards, auto loans, etc.): 10-15%
your total debt obligations should be around: 36-40%

Calculating Your Debt-to-Income Ratio

Input the following data to calculate your debt ratio:

monthly housing debt/rent expenses including taxes, insurance
monthly installment loan payments
monthly revolving credit line payments
real estate loan payment on non-income producing property
alimony and child support
any tax or legal assessments
use this calculator to calculate the monthly expense from an annual expense
=

 


Monthly Mortgage or Rent (including escrow):
Monthly Auto or Other Installment Loan Payments:
Minimum Monthly Credit Card Payments:
Minimum Credit Line Payments (home equity):
Monthly Real Estate Non-Income Loan Payments:
Monthly Alimony and Child Support Payments:
Monthly Tax and Legal Assessments:
Monthly Other Payments:

Monthly Gross Salary or Pay:
Annual Bonus:
Monthly Alimony / Child Support:
Other Monthly Income:
Monthly Debt Payments:
Monthly Gross Income:
   
Debt-to-Income Ratio (s/b around 36%): %

Debt Ratio Barometer:

  • 36% or less:
    debt level within acceptable range for most people.

  • 37%-42%:
    debt level a little high, need to take corrective action to bring debt level down. You may consider paying off or consolidating some of your debt.

  • 43%-50%:
    danger level, need to take immediate action before you lose control of your financial situation.

  • 50% or more:
    excessive debt loan, may need to seek credit counseling services
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. Your actual mortgage lending rate may vary depending on your credit quality and lender. The circumstances surrounding your credit and loan qualifications may result in different calculations.

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needed to qualify

Your Employment

Your capacity to repay the loan is contingent on your employment and other income sources.

Lenders like to see home equity applicants in steady jobs with verifiable income. Lenders will likely call your employer to verify your employment position and salary/wages.

Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for a loan.

 

Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income

These documents will include your personal tax filings and other information as required.

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Helpful Tools

Some helpful forms to select and manage contractors:

home equity financing map
lender comparison sheet
bank equity 10-step plan
loan amortization worksheet

 

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