Canadian lending institutions have offered homeowners home equity loans and personal loans; using their residential property as collateral. Homeowners who have paid more than 20% of their mortgage are allowed to access a loan of up to 80% of the market value of their property.
The flexibility of a home equity loan offers a significant advantage for borrowing clients. They can pay off their loan in full without penalty or pay at their own pace, simply by paying only the monthly interest, without paying principal. The institutions that carry home equity loans speak highly of them; indicating their flexibility and convenience. It acts as a safeguard in times of trouble. It allows you to finance your home improvement or the purchase of a car; knowing that you will be paying a lower rate of interest. It can also be used to acquire another property.
Lenders use qualification guidelines to manage the risk of lending large amounts of money to strangers and to ensure that they are likely to be paid back as agreed. To determine the suitability of a home equity loan applicant, lenders consider 4 things: debt, income, credit, and property. However, a home equity application is secured by the property and so, this is the first thing the lender looks at and for that reason, an appraisal has to be initially done.
Income and Debts
Lenders want to see that the borrower has enough monthly cash flow to cover their monthly payments, in addition to all of their other monthly debt obligations. A general rule of thumb is that your monthly debt payments (not including the original mortgage) should not exceed 5-7% of your monthly income before taxes. Otherwise, you will begin to limit the size of the loan that you can qualify for. One of the main reasons that many people are turned down for a home equity loan or Canada personal loans is because they have a new car payment that takes up too much of their borrowing capacity. Any debt held outside of Canada must also be included in the calculations.
Borrowers must have guaranteed full-time employment or a minimum of 2 years of work history with the same employer. Lenders also want to make sure all income taxes are current and paid in full before considering the lending of money. All income must be verifiable and consistent to be considered acceptable.
The third characteristic of an applicant that lenders will evaluate before lending them money is their credit. Lenders want to make sure the applicant consistently demonstrates responsible use of credit. Past credit behavior is seen as an indicator of future habits. Your credit score doesn’t have to be perfect, but you should generally have the minimum credit score.
The final variable that lenders will consider is ownership. They want to see that it is of sufficient quality to easily resell in the event that the lender has to repossess and sell the property to get their money back. Residential properties in desirable locations that comply with local building codes and have no history of dangerous or illegal activity are preferred. Properties such as farms, vacant land, mobile homes, very old properties, and properties in remote locations are more difficult to finance.