When applying for a mortgage or home equity loan or line, there are some equations that come into play. Here are the most common factors that will be calculated to determine your credit worthiness.
Loan to Value
Loan to Value (LTV), is a percentage of what you owe compared to the home market value. Typically, a lender will order an appraisal to determine the market value. Most lenders will allow up to 80% Loan to Value to get the best rates. For example, if your home’s market value is assessed at $200,000 you would need to owe $160,000 or less to have an LTV equal to or less than 80%. Some, such as Webster, will allow even higher LTV% for qualified borrowers, though terms or pricing may differ.
Debt to Income
DTI or Debt to Income ratio = Gross Monthly Debts divided by your Gross Monthly Income. Total gross monthly debts includes things like your minimum credit card payments, mortgage payments (including taxes and insurance), car payments, and the estimated payment for your new loan/line. Each lender and situation is different, but typically on most home equity loans and lines a ratio under 50% or less is ideal. In other words, if your gross monthly income is $5,000, your monthly debt should not be more than $2,500.
Your credit score will play a big role in whether your lender can approve your loan. It will also influence the interest rate you receive. Generally speaking, higher credit scores equal lower interest rates, if you are applying jointly, most lenders will use the lower of the two scores. Everyone is entitled to one free credit report of the three major credit bureaus every twelve months. Contrary to common belief, checking your own credit will not affect your score. Typically your score is not included for free, but there is usually a way to purchase at a low cost. It’s important to keep an eye on your credit and take action on any false entries that could lower your score. To see how these can potentially affect your interest rate, here is a link to Webster’s home equity rate calculators.