How Lenders Choose Whether Or Not To Accept Home Equity Loan Applications
Everybody would like to know how lenders decide whether or not to accept home equity loan applications
. There is difference between home loans, and home equity loan applications. Home equity loans resemble second mortgages, as the homeowner is able to withdraw his equity in the home. This equity is built over years and is better known as capital appreciation. Therefore, a home purchased in the year 2000 for $100,000 would fetch much more than $100,000 by 2009, or even 2005. If the homeowner had purchased the home in 2000 by taking a home loan of $90,000, repayable in 15 years, then substantial amount of that 90,000 is also paid by 2009.
Effectively, the homeowner has both the capital appreciation and the principal repaid forming the home equity that he/she can cash out. Though the equity built in this property may be substantial, lenders allow the homeowner to avail only part of this home equity.
Factors that affect lenders' decisions are:
* Age of the borrower
* Borrower's credit score
* Employment record
* Income
* Family size
* Liabilities
* Retirement savings
* Age of the residence
The age of the borrower is an important criterion because home equity loans are repaid over a long period. If the borrower is nearing retirement, then it is unlikely that he/she would have adequate income at retirement to repay the loan amount.
Lenders have a network through which they become aware of borrowers' promptness in paying any dues. Therefore, if a borrower has been irregular in repaying home loans or other loans, then chances of lenders rejecting his application for a home equity loan are much higher. Similarly, if the borrower has been changing jobs once too often, then the lenders become skeptical about actually getting their money from the borrower.
Income of the borrower is another issue. If the borrower has enough equity, but does not have enough income to cover any installments on it, then the amount of home equity loan may be confined to the extent that the borrower can repay. At times, this may even be nil. Family responsibilities also affect the lender's decision. Age of the children matters as higher education is costlier, and the borrower may not be able set aside the equated monthly installment as expected. Likewise, if the borrower already has too many liabilities, it might be unwise on the part of lender to lend some more money to the borrower for purposes other than clearing the outstanding loans. Age of the building is important because the borrower may have to show some rental income to arrive at loan eligibility levels, but such income may not be there in future.
Though retirement savings such as 401k and IRA in the United States cannot be brought under bankruptcy proceedings, the lender would still be interested in these savings, as in the worst-case scenario; the borrower may choose to pull out funds from these savings to avoid foreclosure.
This is how lenders decide whether or not to accept home equity loan applications. There are no predefined biases, nor any random selection of applications. All applications are closely scrutinized to identify whether or not the borrower can really repay the loan that he/she is seeking.
by: Jason Witts
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