Shopping for Loan
Understanding Your Credit Rating and How it Affects your Loan
 Your
credit rating is a measure of the risk you pose to a lender when
you borrow money. Your credit rating will help determine whether
or not you qualify for a home equity loan, how much you will be
charged in interest and fees, and how much you can borrow.
Your credit rating is affected by your credit history, your debt-to-income
ratio, your LTV ratio and your employment history.
Your Credit History and Credit Report
Your credit history, obtained through your credit report, is a record
of how you have paid money that you owed. Your credit history will
be negatively affected by late payments, too much open credit, too
much debt, too many credit checks, collections or judgments against
you, and of course, bankruptcies. To lenders, your recent payment
history is the most important aspect of your credit report.
Since your credit score is greatly affected by your credit report,
it is very important to make sure there are no mistakes in the report
before you submit a loan application. The following three major
credit reporting agencies can help you obtain a copy of your credit
report:
Equifax: 800-685-1111
Experian (formerly TRW): 888-397-3742
Trans Union: 800-916-8800
If your credit report does contain inaccurate information, the
credit bureau is required to investigate items that you dispute.
Those companies furnishing inaccurate information to the credit
bureaus must also reinvestigate items that you dispute. If you still
dispute the credit bureau's account after a reinvestigation, you
can include a note in your credit report that disputes the payment.
(Another type of note that you can include in your credit report
can explain why you were delinquent in paying past bills.)
If the lender rejected your application because of negative information
in your credit report, the lender must tell you this and give you
the name, address, and phone number of the credit bureau. You can
get a free copy of that report from the credit bureau if you request
it within 60 days.
You should always ask the lender how your credit history is affecting
the price of your loan.
Debt-to-Income Ratio
Your debt-to-income ratio is the ratio of your income that is spent
on paying debt such as your mortgage, credit cards, car payments
and other loans. The lower your debt-to-income ratio the better
- some lenders have maximum debt-to-income ratio that they will
not exceed.
Your LTV Ratio
Your current loan-to-value ratio and your loan-to-value ratio with
your home equity loan will also influence your credit rating. The
less you owe on your house, the better. Lenders see less risk in
lending money to those who have more equity in their home.
Employment History
Employment stability represents less risk to the lender. The longer
you have been at your current job the better.
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