What is needed for a home equity loan?
If you’ve been thinking of taking out a home equity loan but are not quite sure how home equity loan applications are evaluated, here is an overview of what you can expect and the items Discover Home Loans reviews on each application. Upon submission, we review:
- Credit Score
- Credit History
- Employment and Income Verification
- Sufficient Equity
To see how these factors will affect your loan amount and monthly payments, use Discover Home Loan’s home equity calculators.
Your credit score is an algorithm that is generally comprised of five facets of your credit past – Payment History (35%), Amount Owed (30%), Length of Credit History (15%), Types of Credit Used (10%) and Recent Inquiries / Accounts Opened (10%).
For Discover Home Loans (DHL) the minimum credit score requirement is 620. Also, the better your credit score, the more likely, the better your rate will be, although there is still dependence on your income and equity. Moreover, applicants with higher credit scores may be eligible to have equity at a Combined Loan-To-Value above 80%. Finally, Discover requires loan amounts requested above $150,000 to be only available to applicants with credit scores of 700 and above.
How to improve your credit score
First, be sure to make your monthly payments on time for all of your open accounts on a consistent basis, as each month may help you build your score. Next, try to pay down your debt to lower your amount owed: by paying more than the minimum payment and limiting any new spending on your credit accounts, you can drive this factor down to push your credit score up. As you pay down debt, don’t close any accounts with zero balances: you will keep the average age of your accounts high by keeping them open. Finally, limit any new applications for credit or loans until you feel your credit score is sufficient to earn approval, as the number of hard inquiries on your credit report may push your score down.
Credit scores are a direct result of your credit past amongst other factors. Late payments can stay on your credit report for up to seven years. However, more recent delinquencies impact your score more than older ones.
How to improve your credit history
While healthy credit habits that limit spending and increase payments will likely contribute to better credit scores, be sure to request your free annual credit report and review it for any errors. You may also be able to work with your creditors to update the status of your account and sometimes remediate any negative reports of the past by calling your card issuer and negotiating hardship.
To help you monitor your credit score, Discover offers a Free Credit Score Card even if you are not a current customer.
Employment and Income Verification
DHL will verify your employment and income information by reviewing your most recent W2 forms as well as your most recent paycheck stubs covering 30 days, if applicable. If you’re self-employed or receive income from other sources than an employer, DHL will ask for your most recent federal income tax returns. If you receive retirement or 401k income, DHL will review a retirement award letter or 401k distribution letter. See DHL's application checklist for a list of documentation needed during the application process.
How to improve your income qualifications
As your ability to repay is a prime consideration in your loan application, anything you can do to increase your income—whether through a promotion, raise, new job, or second job—can help, although you may need to provide a steady income at any new level for a period of 30 days or more.
The primary metric DHL uses to determine your qualification and interest rate is your combined loan-to-value ratio (CLTV). CLTV is calculated by taking your existing mortgage balance(s) plus your desired loan amount, divided by your home value:
CLTV = (Loan Amount + Mortgage Balance) / Home Value
For the average applicate, DHL lends upto 80% CLTV , but depending on your loan amount and credit score, they may be able to go as high as 90% or 95%. DHL will perform an evaluation of your property’s current market value using an Automated Valuation Model (AVM), Property Condition Report, and in some cases we will schedule an appraisal. DHL also reviews your mortgage statements.
Home equity loans can help you accomplish a number of things, including home improvement, debt consolidation, paying for your education or other major expenses, and even refinancing.
How to improve your available home equity
Your home’s equity measures your current home’s value and subtracts the amount remaining on your mortgage loan. To increase your equity, you need to either increase the assessed value of your home or decrease the amount remaining on your mortgage.