Home Equity Loan Essentials: Advice Before Borrowing Against Home Value

Many homeowners make the decision to borrow against home equity without proper financial knowledge. Before a homeowner considers a loan of this nature, it’s important to understand the financial requirements that many lenders consider critical and essential.

Credit Score and Credit History

First and foremost, homeowners are encouraged to know his or her overall credit score. Home equity loan approval depends heavily upon an individual’s credit standing. In many cases the homeowner will need an overall score of at least 720 or higher to be approved for a solid home equity loan. The higher the credit score, the lower the interest rate.

Before a person considers applying for a loan, it’s vital the individual increase his or her credit score. The loan “approval or decline” decision is strongly based upon an individual’s credit status and reputation.

Debt-to-Income Ratio

Another thing many lenders view closely is an individual’s debt-to-income ratio. Homeowners are advised that debt cannot exceed 38% of an individual’s monthly income. This includes the homeowner’s initial mortgage, credit cards, and automobile loans.

If an individual is aware of his or her current debt status, its paramount the debt issue be resolved before the initial application process.

Area Home Prices

Are home prices in the area on a steady decline? If the answer is “yes,” homeowners are advised to wait until prices of area homes begin to stabilize. If an individual has many homes in the area that are bank-owned or on the verge of foreclosure, the individual’s home value will decline at a rapid rate.

Homeowners are advised never to tap into home equity until the home has a solid value. If most every home in the neighborhood is in “trouble,” it will be wise to wait before applying for a loan.

Make Wise Home Equity Decisions

In the same way spending more than a consumer has can be an obvious way to encounter debt, using home equity for non-investment expenses can be harmful as well. Homeowners are advised never to use this form of loan to pay for frivolous personal items or vacations.

Home equity loans are meant for investing which will add to an individuals overall wealth in the long-term. Never use the loan for a “quick fix” in order to purchase items of personal desire. Homeowners are encouraged to use the loan to trade up to his or her next residence or aid in retirement contributions.

Homeowners are directed to remain financially educated and never make a swift decision that can possibly cost the individual (literally and figuratively) in the long run.