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Finance

What's Needed to Qualify

Key Qualifying Criteria

Introduction
Home Appraisal
Credit Rating
Capacity to Repay
Your Employment
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introduction

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

Page Topics:

First Topic: The Home Appraisal

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 and market.

Loan-to-Value (LTV) Calculation

Most lenders qualify equity line amounts using a Loan-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:

Estimated Appraised Property Value
(times) % LTV
(minus) Mortgage Balance and Any Secured Liens on the Property

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 LTV calculator to estimate qualifying amount

Check 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.

Higher Credit Ratings Qualify for Financing

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

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

Need 1 Year of Good Credit History

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.

Furthermore, 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 Good Credit

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

Your Capacity to Repay

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

homeowners 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.

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 may request a copy of a current W-2 and pay stub from your employer. They 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.

What About Self Employed

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 such as tax returns, financial statements, and balance sheet.