Two Factors Pertinent to Home Equity Loan Lenders
September 22, 2007 –
Income
Lenders want to know how long you’ve been at your job, how much you make, 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 credit card bills, car payments, paying the mortgage 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. They are thinking that your utilities, taxes, services, food and other living expenses will constitute 64 percent of your income.
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 applications regarded as “stated”, where business owners could state their income without providing tax statement proof will become less available. Lenders abusing the situation began offering that option to anybody. The result was that portfolios they sold to the secondary market quickly lost their value when non-credit-worthy borrowers defaulted. The secondary markets who buy these folders from lenders then had to change the parameters which they would be willing to accept. This resulted in an adjustment in the mortgage and housing market which we are seeing right now.
Loan to value ratio, or LTV
This is the percentage expressing the ratio between what you owe on your house and what it’s worth. If your house is worth $200,000 and you still owe $160,000, your loan-to-value ratio is 80 percent, because $160,000 is 80 percent of $200,000. When you bought the house, calculating the LTV was straightforward: the mortgage amount divided by the home’s purchase price.
It’s more complex when you get a home equity product, because the home’s value has likely changed since you bought it. The lender will get an appraisal, or estimate, of the home’s current fair market value. They will add the proposed equity loan or credit line and the current mortgage balance and divide that by the home’s current value. This is expressed as the new LTV ratio.
As we mentioned above, equity lenders want to keep your total LTV 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. That size of a loan would increase your total housing debt to $160,000, or 80 percent of the home’s value. There are lenders that will go higher — even, in some cases, up to 125% of the homes value for the most creditworthy borrowers. These are called high loan-to-value (high LTV) loans, and Equity Guard’s research of 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 payments.
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