Home Improvement Loans: How Lenders Evaluate You

In the 16th century, Francis Bacon mused, "Knowledge is power." Although he wasn't talking about home equity loans, his truism is equally applicable to the loan application process. When you're shopping for home equity loans, give yourself every advantage by knowing how a lender will evaluate you during the process.

Are You a Good Candidate?

Lenders prefer to interact with customers whom they trust. That's why they offer low-risk borrowers certain advantages, including preferential home equity loans. Here's what they look at when they evaluate you:

Credit score. Your credit score is determined by information found on your credit report. Primary factors include payment history, amounts you owe, length of credit history, new credit, and types of credit.

The credit reporting agencies-Equifax, Experian and TransUnion-are each required to give you one free credit report annually. Periodically reviewing your credit reports for accuracy is a must. Seeing your credit information is the first step in identifying where improvements can be made.

Credit and payment habits. Certain behavioral patterns are characterized as higher risk. These include repeated late payments, drawing on one credit line to make payments on another, maxing out available credit, and paying only the minimum due every month.

Alternatively, good credit management practices include making timely payments and reducing outstanding debt whenever possible. Borrowers demonstrating these patterns are likely to be offered lower home equity rates.

Income/Earning Potential. Given two borrowers with the same credit score applying for the same loan, the borrower with the lower income will be considered more risky that his high income competitor.

Home Value Trends. Approval of your home equity loan is dependent on your home's value. Since fluctuations in value may restrict your access to home equity credit, it's a good idea to understand property trends in your area.

Knowing what lenders are looking for empowers you on two levels. If you're in the market for a loan now, you'll have realistic expectations. If you don't need the loan just yet, you can take steps to improve your risk profile for the future. If knowledge is power, knowledge of your credit report is financial power.