Home Equity Loan Application Basics

Your home equity loan application is evaluated based on a combined set of criteria, namely income, credit history, and the current amount of equity you already have in your home. These factors determine your chances of approval at a good interest rate. It is beneficial to examine each of these parts of your financial situation before filling out the loan application in order to estimate the best possible home equity loan. Another part of this application process is to compare loan terms that several different lenders offer. This will determine which loan fits your individual circumstances the best.

Types of Lenders

For home equity loans, you have a choice of enlisting the services of different lenders, such as banks, mortgage lenders, or alternate lenders. Borrowers with a savings or checking account can choose to apply directly for a home equity loan through that bank. If you have been an established customer with the same bank for a longer period of time, you have a better chance of being approved for a desirable interest rate due to this good banking history. At the time of application, banks require information on your current mortgage to determine the current amount of equity you already have.

If you choose to go through a mortgage lender for your equity loan, most mortgage companies who offer this additional loan are more conservative lenders than banks. The company may approve a smaller loan amount or a slightly higher interest rate than other types of lenders. The purpose behind this is to reduce the risks of default on the original mortgage loan.

Alternative lenders offer home equity loans that are more tailored to a borrower's individual situation, although these loans can have a higher risk rate. They tend to have both higher interest rates and higher maximum loan amounts. They are often the most viable option for borrowers whose credit history does not qualify them for home equity loans through more traditional lenders.

Current Home Equity

Any type of home equity lender will consider the applicant's current home mortgage amount. A good history of mortgage payments builds up equity in your home that largely determines the final amount of the home equity loan. The lender examining your application will calculate a home value to loan ratio, which shows the percentage of your total home equity that can be loaned out. The better the mortgage payment history, the higher this percentage amount will be.  

Income

Income is the next most important factor in determining your qualifications for a home equity loan. If you happen to have an income that is greater than the amount of your existing home equity, you can qualify for a higher percentage from the value to loan ratio. Two partners with a joint mortgage have the option to submit a joint home equity loan application to increase the loan amount as well. While lenders do factor in applicant's credit rating, credit scores only affect the terms and interest rate of the home equity loan, rather than the actual loan amount. It is advantageous to the potential borrower to make sure all debts are current before applying for a home equity loan.