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Home Equity Loan or Home Equity Line of Credit – Which is right for you?
The most common type of home equity loan is the term loan. This loan is set for a fixed amount of time, anywhere from five to fifteen years. Such loans are typically granted for up to 80% of the value of the home, but some lenders will lend up to...
Identity Theft and Credit Reports
To say that Identity Theft has reached epidemic proportions in the UK doesn't appear to be any exaggeration on the facts which are commonly bandied about... even by totally responsible organisations.
If, as I read, 80% of Councils have reported...
Techniques For Building Good Credit
Whether you are just starting out with no credit to your name or
trying to recover from having accumulated some bad debt which
has ruined your credit, there are simple strategies you can
apply to get your credit back on track.
Many young...
What you need to know about debt negotiation on credit cards
Debt negotiation on credit cards is often referred to as credit card debt settlement. Whenever you make a credit card payment- or even pay your utility bills- it usually gets reported to one- or all- of the three main credit agencies. This...
Your Credit Card Payment Is Rising: Warning Tips
Did you know your minimum credit card payment is rising? A new government program working to get Americans out of credit card debt is pushing credit card issuers to raise minimum monthly payments. Will you be able to make the higher monthly payment?...
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The Three Factors of Credit-Worthiness
Between the Internet, well-meaning family and friends, and
know-it-all articles in the print media, it's hard to know where
the facts end and the nonsense begins. Facts are everywhere, but
so are urban legends, hidden agendas, and opinions posing as
truth. Fact or fallacy - it can be devilishly hard to tell the
difference.
It's all about risk.
Lenders are anxious to lend. It's what they do and it's how
they make a profit. But they are every bit as anxious to insure
that they will get their money back. Therefore, all mortgage
lending is predicated on assessing the possibility that a loan
will be repaid.
Since there is no crystal ball, lenders use three main factors
in assessing risk.
1) Past Performance
Lenders love history - a borrower's history. They believe that
nothing says more about what will happen that what has happened
before. Therefore, lenders look closely at how a potential
borrower has managed his past obligations. Someone who has a
history of making payments late or not at all is assumed to be
someone who is likely to continue that pattern.
This is where your credit report comes in. A credit report is a
detailed history of how you've treated your credit and
responsibilities in the past. Lenders look at your credit report
almost exclusively, with the one exception being rental history
when buying a house (rental history doesn't show up on your
credit report).
Now, information you won't get from your mortgage broker!
Credit scores typically range between 350 and 850. From a
practical standpoint, scores range between 500 and 700. Anything
less than 500 is horrible and anything more than 700 is
fantastic. 620 or less is generally considered "sub-prime",
meaning you won't get the rate that are the lowest out there and
you'll probably have to take a prepayment penalty.
Sometimes if your score is higher than 620 you may still be
sub-prime, if you have very little equity in the property or
issues with your income. This will be covered in more detail
further below, but don't let your loan officer tell you your
scores are horrible when they're not!
2) Financial
Commitment
The larger the investment, the more likely someone is to
protect it. Therefore lenders like to see borrowers make a
financial commitment to their home. Lenders consider a 20
percent downpayment to be a much more comforting level of
commitment than 5 percent down, and weigh it accordingly.
This is where the term loan-to-value (or LTV) comes in.
Loan-to-value is a ratio that compares the size of the loan in
relation to the value of the property. For example, if you own
$80,000 on a home valued at $100,000, this would be an 80% LTV.
Generally speaking, the lower the LTV, the less risky the loan
and the more likely the lender will approve the loan and give
you a great rate.
3) Ability to Repay
Motivation to repay is quite different than the ability to
repay. Even the most responsible borrower borrower can find
himself in difficulty if his income is simply not sufficient to
make promised payments. Lenders typically use a ratio called the
debt-to-income ratio, or DTI. This is a ratio of the total debts
in relation to the gross income. In other words, if your
mortgage, credit card, and car payemnts all add up to $3,000 per
month and your gross monthly income (before taxes) is $6,000 per
month, your DTI would be 50%.
Generally speaking, the lower the DTI the less risky the loan
and the more likely the lender will approve the loan and give
you a great rate. 50% is generally the max, though 45% or less
is ideal.
By putting all three of these criteria together, a lender can
get a very good idea of whether they'd like to extend credit to
you and if so, what rate and scenario you would qualify for.
Generally speaking, by putting more money down (a lower LTV),
spending less than you make (a lower DTI), and having a great
credit score, you will qualify for better loans and lower
interest rates.
Copyright 2005 by Carey Pott
About the author:
Carey is the Publisher of Home Experts Online.
Home Experts Online offers people the opportunity to learn from
experts around the world on topics related to purchasing, owning
and maintaining a home.
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| An independent federal agency that supervises and insures 7152 federal credit unions and insures 4240 state-chartered credit unions. |
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| DebtAdvice.org is a service provided by the Members of the National Foundation for Credit Counseling (NFCC), most of them known as Consumer Credit ... |
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| FreeCreditReport.com | Free Credit Report and Credit Score Online ... |
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| The Credit Card Prank |
| In my lifetime, I have made nearly 15000 credit card transactions. ... Credit card signatures are a useless mechanism designed to make you feel safe, ... |
| www.zug.com |
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| Credit magazine, corporate bonds, derivatives, structured credit ... |
| Credit magazine provides information on the international credit markets for credit investors, issuers and market professionals. |
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| CUNA: The Credit Union National Association |
| News and resource directory about credit unions. |
| www.cuna.org |
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| Credit/Debt Management - Tools and Advice for Managing Credit and Debt |
| Drowning in debt? Trying to improve your credit score? This is the place for you. Get real world information and tips, as well as the legal low down, ... |
| credit.about.com |
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