Lenders use your credit score to assess your likelihood of paying back your loan. The higher your credit score the greater your chances of being approved. Lenders typically look for credit scores that are 640 or above. It's possible to get an equity loan with a lower credit score, but you'll pay a higher interest rate on your loan assuming you meet other lending requirements.
Full Disclosure of Documentation
Lenders need to verify your income history, who you work for, and for what length of time. They can verify your employment by a simple phone call to your employer. You need to be able to verify your income over a period of three years by providing your last three years of tax returns and W-2 forms. If you're self-employed, you can use bank statements, invoices, and contracts from vendors. There isn't a particular income requirement to determine eligibility for an equity loan, but gaps in employment can be a roadblock.
Debt to Income
Your debt to income ratio must be below 50 percent. Your debt to income ratio indicates to a lender your financial health and ability to carry additional debt. It is calculated by dividing your income by your existing debt. If you make $60,000 annually and have $30,000 of debt, your debt to income ratio is 50 percent.
You must get an appraisal. An appraisal of your home is issued by a state-certified appraiser who determines the value of your home. Appraisers use factors like location of your home, property values of similar homes in the area, and condition of your home to determine the value of your home. Home improvements, like turning your crawl space into a full basement, help to increase the value of your home. If homeowners in your area don't take adequate care of their property, the value of your home may decrease even if you take great care of your home.
Loan To Value
Lenders use an 80 percent formula to determine the amount of your loan compared to the appraised value of your home. What amount will your equity loan be if your home is appraised at $200,000 and you owe $100,000? Use the 80 percent formula. Multiply 80 percent times the appraised value of your home ($200,000), which equals $160,000. $160,000 minus $100,000 allows you an equity loan of up to $60,000. Lenders use the 80 percent rule so that you won't take more equity from your home than you can afford to repay.