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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.
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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