Your Home Equity Loan Application Basics

When you submit home equity loan application, the current equity you have in your home along with your credit rating and income will be the largest factors a lender considers. Using these factors to set up an advantageous situation for yourself will give you the best chance of approval at a good rate. Next, you will have to decide which lender to us to fund your loan.

Elements of a Successful Application

  • Current home equity - The amount of equity you have built in your existing home through mortgage payments will largely determine the limits of your home equity loan. You will be given a loan to value ratio, which basically means the lender will choose a percentage of your actual equity to lend to you. If you have been making payments for some time, you will have more equity to collateralize to increase your limits.
  • Income - The second largest factor affecting the limits of your home equity loan is your current income. On a combined mortgage and a joint home equity loan application, two people can use their incomes and combine them to increase their limits. A home equity loan is always given at a loan to value based on the equity in the home. However, if you have a greater income, you have the best chance at a high loan to value.
  • Credit rating - All loans partially depend on your credit rating. While your limits will not be affected as much by your credit score, your interest rate and loan terms will be. Before seeking a home equity loan, assure your credit is in line by paying down balances on credit cards and making all monthly installments on other loans.

Choosing Where to Apply

  • Using your mortgage lender - Some mortgage companies will have options for those who already have a mortgage with them to additionally seek a home equity loan or line of credit. In this case, the loan will typically be smaller. The mortgage company will be more conservative in order to prevent you from defaulting on the original lien. This is still an attractive option, though, because it is very streamlined and will typically come with a low to moderate interest rate.
  • Using your bank - If you have a checking or savings account with a current bank, you may apply directly for a home equity loan. In fact, it is common to get the best loan terms through a bank you already work with. In this situation, you will need to provide the lender information on your current mortgage so they can determine how much equity you own for monetization purposes. Your credit report will actually show your total mortgage size as well as how much you have paid off, so this can be used for verification with your bank.
  • Using an alternative lender - If you are up for a higher risk loan, you may find more customizable loan terms through an alternative or online lender. The limits for these loans tend to be higher, but so do the interest rates. This is the best option for people who do not qualify for traditional loans.