The two most common types of renewable loans are lines of credit and balloon mortgages. A line of credit is an ongoing availability to borrow money using your property as collateral. You pay back the balance and the money is available again. A balloon mortgage is a short-term loan with a long-term repayment schedule. For example, you make payments as if the loan would be paid in 25 years, but the actual maturity is 10 years. The final payment "balloons" to include the entire principal balance. After that, you must renew the loan.
Your lender will review the renewal as if it is a new loan. You must provide your most recent year’s tax return, W-2 form and updated pay stubs. It may also require a personal financial statement listing your assets and liabilities. The lender wants to see that you have stable employment and that your income is still strong. The lender will run your credit report and compare your debt to your income, and will want to see that no more than 40 percent of your income is allotted toward debt.
The lender also uses your credit report to review your history. Credit scores usually range from 350 to 850, with anything over 700 considered “good.” If you have low credit scores, judgments, collections, liens, or have filed for bankruptcy, the lender may opt not to renew your loan. It also will review your internal history with the loan. A history of slow or missed payments will work against you. Rather than renew the loan, the lender may demand payment in full. In this case, you must come up with the funds or find another lender to refinance.
To renew a loan, the bank wants to ensure that the value of your collateral equals or exceeds the loan amount. Depending on the type of collateral securing the loan, the bank may lend up anywhere from 50 to 100 percent of the value of collateral. For example, if you pledge cash collateral like a savings account or certificate of deposit, you can borrow 100 percent of the value because it isn't difficult for the lender to take control in the event of default. Claiming real estate from a borrower in default is more difficult due to the legal cost of foreclosure. In that case, most lenders only lend up to 80 percent of the value of the real estate -- and the bank will appraise it to make sure it continues to support the loan.
Lenders require documentation to renew a loan, but unlike with a new loan closing, the paperwork is minimal. Usually you sign a single document reciting the original terms and stating the terms of the renewal. If your renewal is conditioned on items such as additional collateral, you must sign a new pledge agreement. For example, if your loan is secured by real estate that has declined in value, you may need to pledge a certificate of deposit (CD) to cover the difference. In this case, you will sign a document giving the CD as collateral for the loan. Once the bank approves and signs the documentation, your loan will be renewed.
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