How much does equity count in loan approval? It counts quite a bit. The more equity you have, the less risky you are as a borrower, at least from the lender's vantage point.
Exactly How Much Does Equity Count in Loan Approval
It's tough to measure or quantify the exact amount of weight that equity carries in determining whether loans are granted, because no two lending decisions are exactly alike. Equity is the amount or percentage of a piece of property's value that is owned by a borrower based on how much of an outstanding loan's balance has been repaid. The unowned portion of a property's value -that is, the amount being borrowed- is known as the loan-to-value. The greater the equity is, the more valuable the property has to lenders, who consider the real estate to be a form of collateral securing a mortgage loan.
Lenders consider equity in conjunction with several other criteria when deciding whether to extend a loan to a prospective borrower. These factors include, not necessarily in order of priority:
- Credit score
- Credit history
- Overall value of the property
- Desired loan amount or loan-to-value
- Down payment
- Other outstanding debt
- The lender's risk appetite
Lender's Risk Appetite
Think of your potential loan as a tiny facet in a big machine, in which all of the other moving parts determine whether your loan application will fit into an opening. Each lender has a slightly different agenda when it comes to making loans. A loan is part of a portfolio that the lender has. Whatever else is already in a lender's portfolio influences the appetite for any new loans. So too, the makeup of a lender's other business departments may also influence appetite for new loans. If the lender is part of a large bank with many different product lines, the objectives of the mortgage loan portfolio will include offsetting the risks in the bank's other departments. The lender also tries to offset risks within the overall marketplace by deciding to give loans to a certain portion of the market.
A lender's risk appetite may be the one thing a potential borrower has the least control over when trying to get a loan. However, would-be borrowers can and should try to seek out lenders whose target market has compatible characteristics. If you have a great deal of home equity, you'll probably get the best deal on a mortgage from a lender that prefers applicants with a lot of equity. Such lenders might describe their target market as having the least risk, or the best credit profile, based not just on the amount of home equity borrowers have, but on all the other financial factors combined.
Equity and New Loans
If you're in the market for a new mortgage, focusing on the amount of equity you have is akin to not being able to see the forest from the trees. Instead of asking "How much does equity count in loan approval," ask yourself which lenders will give you the best deal based on your overall credit picture.