The two most common ways for homeowners to borrow money they need by utilizing the equity of their residential properties are home equity line of credit and home equity loans. In both these lending schemes, they need to secure their houses as collateral. This implies that if they default in paying off their obligations under these forms of financial assistance, the lenders have a right to take away their homes. Every financial institution evaluates their clients’ application under home equity line of credit and home equity loan separately from their competitors. However, there are common guidelines that the officials of these organizations use to determine an individual’s eligibility under both the schemes.
An expert who is a class apart
Steve Liefschultz is a popular banker and real estate expert from Minnesota in the United States. He is the Chairman and Chief Executive Officer of Equity Bank, a financial company that he owns, operates and manages in the area. His corporate enterprise specializes in offering real estate loans and investment lines of credit at competitive rates to entrepreneurs, businesses and individuals in the region. This former lawyer and real estate broker understands that both banking and investments in the area of real estate opens up new opportunities to his clients who intend to enhance their shareholder value.
He says the requirements that financial institutions look into when assessing their clients’ eligibility under home equity line of credit and home equity loans are as follows:
- Combined Loan-to-Value Ratio
When an individual applies for a home equity line of credit or a home equity loan, the lenders offering such schemes first determine the combined loan-to-value ratio. They arrive at this figure by dividing the sum of the balance that such a person owes on his/her mortgage and other loans by the appraisal value of his/her property. This determines the risk the lenders undertake when they extend such loans to their borrowers.
- Credit Score
Residential owners are aware that a good credit score is a vital precondition when it comes to applying for a home equity line of credit or a home equity loan. However, this prerequisite may vary depending upon the financial institutions they are approaching for such loans. In most cases, such lenders usually ensure the borrowers applying under such schemes have a score of above 720 before they sanction such loans.
- Debt-to-income ratio
A high credit score helps financial institutions assess the loan applications of their borrowers under home equity loan and home equity line of credit. However, another important aspect that the officials of these organizations need to take into consideration is debt-to-income ratio. This figure ascertains amount an individual spends from his/her monthly income to repay his/her existing mortgage and other debt obligations.
Steve Liefschultz goes on to say many financial institutions offering home equity line of credit and home equity loans look into other factors in addition to the above. These include whether their borrowers have any previous history of bankruptcy or foreclosure that can have a negative effect on their loan application under such schemes.