Is a Credit Check a Part of Applying for a Home Equity Loan?
If you are considering applying for a home equity loan, know what to expect before going to the bank. Although banks secure home equity loans by the value of the property, that doesn't mean lenders don't want assurance of your credit-worthiness. A credit check is an integral part of the application process.
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Why Lenders Want a Credit Check
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The information in your credit report is a goldmine for lenders. It tells lenders if you work and where, how much debt you currently carry, and how well you've paid your debts in the past. Lenders use your credit history to determine whether you are a good credit risk, and to decide what kind of interest rate to offer you. The better your credit history and score, the better the interest rate they will offer.
What Lenders Look For
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When lenders check your credit as part of the home equity loan process, they want to see proof that you have used credit wisely in the past. They feel it's a good determinant of how you will use credit and repay debt in the future. Lenders like to see that you pay your bills on time; that you do not have a large number of outstanding debts, high credit card balances, or any other indication that you live beyond your means. They look for evidence that they can trust you with new credit.
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What Lenders Do Not Want to See
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Despite the fact that your home collateralizes a home equity loan, other financial obligations may affect your ability to repay. Furthermore, poor financial decisions in the past may give lenders pause before extending credit. Lenders do not want to give you a loan if there's any doubt that you can to pay it back. They use your credit report to make that decision. If your credit check uncovers a high debt-to-income ratio, lenders will rightfully question your ability to meet all your financial obligations. Likewise, if there is a bankruptcy or foreclosure in your credit history, then lenders have proof that you have failed to repay debts in the past. Depending on what your credit report discloses about your current use of credit, a bankruptcy or foreclosure in your past may disqualify you for the best interest rate, if not for the loan.
Your Mortgage and a Home Equity Loan
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Another section of your credit report lenders look at in relation to a home equity loan is your mortgage. If you're under water in your mortgage, or owe more on the mortgage than the home is worth, your chances of getting a home equity loan are nil. If you are not under water, lenders often expect you to have at least 20 percent equity in your home before making the loan. In addition, if you already have a second mortgage, or have used your home as collateral in another financial transaction, lenders may be wary of extending more credit against a home that is already standing good for other loans.
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