Getting a home equity loan in an impossible market
Today, many mortgage lenders don't even bother to offer home equity loans (second mortgages). Too many holders of second liens got burned when homes lost value and the homeowners walked away, or when folks lost jobs and the first lien holder foreclosed.
Mortgage lenders that didn't go belly-up have retrenched, many offering only conforming first mortgages or jacking up the qualifications for second mortgages.
Home equity loans: The good old days
One national lender's 2007 home equity mortgage guidelines reads like some fantastic fiction today:
The minimum credit score for a $50,000 loan was 620, and with a score of 740, you could get a loan of up to $300,000 and 100 percent of your home's value. You didn't need to prove your income and could even take 80 percent home equity lines of credit against investment properties.
Needless to say, no lender is giving that kind of deal anymore. There are three main obstacles to home equity loan availability these days.
Obstacle No. 1: Evaporation of home equity
The biggest reason for the contraction in home equity financing is the contraction in home equity. A CoreLogic report released March 8, 2011, reports that nationwide, only 54 percent of homeowners with mortgages have at least 20 percent equity--the bare minimum needed to accomplish any sort of home equity borrowing.
In fact, according to the report, nearly one in four mortgage borrowers in the U.S. have negative equity.
However, the pain is not equally distributed. Five states have roughly a third or more borrowers underwater: Nevada (65 percent), Arizona (51 percent), Florida (47 percent), Michigan (36 percent), and California (32 percent).
Obstacle No. 2: Stricter program and mortgage underwriting guidelines
Even if you're among the lucky 54 percent with the bare minimum home equity for a second mortgage, that might not be enough. Home equity lenders don't lend up to 100 percent of your home's value the way they used to. Many large banks top out at 70 percent.
In addition, a search of mortgage lenders' underwriting guidelines turns up a slew of requirements that did not exist four years ago. For example:
- Contingent liabilities are now being taken into account (liabilities you're not obligated to pay now but might be later, such as loans on which you are a co-signer). Underwriters today may add those potential payments in when determining your debt-to-income ratios, because so many co-signers today are being forced to make payments that primary borrowers have stopped making.
- Minimum credit scores have been ratcheted up from 620 to 660, to 720 to 760.
- Home equity lenders are demanding more evidence of job stability. Requirements for salaried employees to have a couple of years' tenure with their current employer are popping up. In the past, you only had to have been in the same profession for two years.
Obstacle No. 3: It's the economy
Credit histories in America have declined as unemployment takes its toll.
Even those borrowers who may have found new jobs may not have been at those jobs long enough to qualify.
Maximizing your chances for a home equity loan
Despite the grim outlook, there are willing and able home equity lenders out there.
Home equity loans are not the standard products of Fannie Mae, Freddie Mac and the FHA, so mortgage guidelines vary widely. Here are some tips to increase your chances of getting a home equity loan:
- Play the numbers. Contact many lenders to check their requirements as well as their home equity loan rates.
- Think small. Credit unions and smaller local banks are often willing to lend at higher loan-to-value ratios than large, national lenders.
Oftentimes, another mortgage product may accomplish what a home equity loan would:
- Consider FHA cash-out refinancing. The FHA allows you to pay off your current mortgage and take additional cash out, up to 85 percent of your home's value.
- Build in renovations. If you need cash for home improvements and have little or no equity, try FHA Title 1 or 203(k) rehab loans. The right sort of improvements may even increase your home's equity.
- Look into a reverse mortgage. If you're over 62, consider a reverse mortgage which comes with no credit or income standards.
Mortgage lending is a cyclical business. As the economy recovers, mortgage lenders will likely loosen up on requirements and make it easier to access the equity in your home.
More help from HSH.com
Advantages of FHA mortgages in 2016FHA loans have become more affordable in 2015, thanks to a drop in the annual mortgage insurance premium that the Federal Housing Administration charges.
10 metros where a home costs about $1,000/monthHSH.com identifies 10 metro areas where you can afford the principal, interest, taxes and insurance payments on a median-priced home for only around $1,000 per month.
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.
Mortgage Rates Radar 09/13/2016: Despite Fed concern, mortgage rates holding steadyHSH.com releases its latest Weekly Mortgage Rates Radar showing a slight increase in popular mortgage rates during the seven-day period ending September 13, as concerns that the Federal Reserve may make a move at next week's meeting have to buffeted the financial markets of late. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
Mortgage Rates Radar 09/06/2016: Modest jobs report leaves rates flatHSH.com releases its latest Weekly Mortgage Rates Radar showing almost no change again in popular mortgage rates during the seven-day period ending September 6, as a fair employment report for August failed to provide conclusive evidence that a move by the Federal Reserve is forthcoming. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).