The topsy-turvy nature of the financial markets has many people wondering if they will qualify for a home improvement loan. Although lenders are more conservative about how freely money is distributed, many of the same conventions remain in place.
Lenders look at three financial fundamentals in order to make a lending decision, reports Wells Fargo:
• Your credit history
• Your home’s available equity
• Your monthly income and debt payments
Your credit rating is the first stop for lenders. A credit score below 500 might be a red flag to a lender who is trying to avoid risky business. However, those with credit scores above 700 are likely to get favorable attention.
A credit report includes information such as types of accounts (credit cards, auto loans and mortgages), credit limits on original loan amounts, account balances on current financial statements and payment history, going back seven years.
The amount of equity in our homes also weighs heavy in the decision to acquire funding. Lenders will want to know the fair market value of your home, which might require an appraisal. To get a quick idea, websites such as Realtor.com and zillow.com have information that will help you compare prices of homes in your neighborhood.
Additionally, the remaining portion of your mortgage must be considered, as well as other outstanding debt that is secured by your home.
“The amount of equity in your home is calculated by subtracting the outstanding balance owed on home-secured loans from your home’s current value,” Wells Fargo reports.
If the outstanding balance on your $800,000 home is $500,000, that means you have $300,000 in equity, providing there are no other debts that are secured by your home.
From there, lenders will consider your neighborhood and other factors before deciding how much they will loan you based on a percentage of your equity, which could be up to 75 percent in some cases.
The third factor for lenders is your monthly before-tax income and all your bills. Bills or debts include all required payments on an outstanding mortgage, homeowner’s insurance, property taxes, car leases and other debts.
According to Wells Fargo, “Lenders may want to ensure that the amount of your monthly debt payment is lower than 45 percent of your monthly income.”
