When evaluating you for a loan against your equity,
lenders assess you for a warm smile, winning personality, dancing
ability and willingness to fetch coffee. Make sure you ask if the
loan officer wants cream or sugar.
Just seeing if you're paying attention.
The lending institution considers your creditworthiness
when deciding whether to extend a loan and how much of an interest
rate you will pay. Your creditworthiness boils down to three things:
your credit history, your income and the loan-to-value ratio.
Credit bureaus collect information about the amount of debt you
have and whether you pay your bills on time. They compile this information
into a file called a credit report, and then boil all this down
to a number between about 300 and 850. That number is your credit
score. Sometimes it's called a FICO score, after Fair Isaac Corp.,
the company that pioneered credit scoring.
describes how to obtain your credit report and understand it. You
can buy your FICO score directly from Fair
Isaac. Federal law entitles you to one
free credit report per year. The report and the score may be
bundled together or offered separately.
||Your credit report contains:
Lenders want to know how much you make and how long you've been
at your job, as well as how long you have been working in your particular
field. They will look at your total debt-to-income ratio: How much
of your monthly income goes toward paying the mortgage, credit card
bills, car payment and other obligations, including the payments
on the equity debt for which you are applying. Most lenders want
to keep that ratio under 36 percent.
Be prepared to show your lender proofs of income,
such as W-2s, tax returns and other earnings statements, or get
ready to be turned down or pay a higher interest rate.
Loan to value ratio, or LTV
This is the ratio between what you owe on your house and what it's
worth. If your house is worth $100,000 and you still owe $80,000,
your loan-to-value ratio is 80 percent, because $80,000 is 80 percent
of $100,000. When you bought the house, calculating the LTV was
straightforward: the mortgage amount divided by the home's price.
It's more complex when you get a home equity product,
because the home's value probably has changed since you bought it.
The lender will get an appraisal, or estimate, of the home's current
fair market value. Then it will add the current mortgage balance
to the size of the equity loan or credit line that you want, and
divide that by the home's current value. That results in the new
Traditionally, equity lenders want to keep your total
loan-to-value at 80 percent or less. So, for example, if you owe
$100,000 on a house that's now valued at $200,000, you could get
an equity loan of up to $60,000. A loan that size would increase
your total housing debt to $160,000, or 80 percent of the home's
value. But there are lenders that will go higher -- even, in some
cases, for more than the value of the home. These are called high
loan-to-value (high LTV) loans, and Bankrate's
surveys of home equity lenders include lenders who offer them.
Expect to pay a higher rate on such loans. You'll only get that
loan or credit line, though, if you earn enough to afford the monthly