What Do Lenders Look at when You Apply for a Home Equity Loan?

If you are interested in applying for a home equity loan, you should first educate yourself on what exactly are the requirements to take out a loan. For many people a home equity loan is a savvy way to save lots of money on interest loans and afford big ticket items that would take years to save for. Here are some tips on what many lenders look for when you apply for a home equity loan or home equity line of credit.
First off, you need to be a homeowner in order to take out either type of loan. It can be a stand alone home, townhouse or even co-op. However you must own the home due to the fact that a home equity loan uses your home as collateral, meaning that if you are unable to repay the loan, the bank may sell your home to recoup its losses.

A bank will look at a few important things, first you and your spouse’s credit reports. Good credit can easily help you save a few points on many loan products. In addition, the bank will send an appraiser to your home to calculate the current value. Once the value of your home is known, the bank can figure out the LTV (loan to value ratio). The LTV is a formula that tells the bank how much your home is worth compared to the debt that you owe on it. In addition, your bank may collect personal information such as your social security number and look at your current job income and job history.

It is important to note that if your home is appraised at $300,000 and you owe $100,000, you will usually not get the full value of your home’s worth (in this case $200,000). In most cases, banks will only give you up to 80% of the equity that you have in your home. This makes it more secure for the bank, in case your home drops in price. The bank can still recoup its loss.

While some lenders are more lenient than others and some lenders will ask for additional information, it is safe to say that the process of applying for a home equity loan or line of credit is usually less intensive than a primary mortgage. Most banks are very competitive with their equity products, so make sure you shop around and do your research before taking out a home equity loan or line of credit.