How to Conquer Common Challenges in Acquiring Home Equity Loans
It pays to work hard and increase your home value. After all, a time may come when you'll need to borrow against your existing value by way of an equity loan. You can use your home equity loan to invest in your house and pay for timely upgrades like a new metal roof or hardwood floors. However, it's not always easy to get home equity loans. Here are some of the challenges you may face.
Debt-to-Income Ratio
When you apply for a home equity loan, it's not enough just to have adequate equity available. Your potential lender will look at your regular income in comparison to your existing debt. If your debt outweighs your monthly income, then you'll have problems qualifying for a home equity loan. While you may qualify, you may not qualify for the amount that you prefer. According to Policy Advice, the average home loan size is $282,660, but if your debt is too high, you may not receive this much.
If your income and debt ratio isn't adequate, you can fix that in a few different ways. For example, try to increase your income by either taking on more hours at your current job or creating a side hustle, as many other people are doing. You may find some gig work or freelance work related to your skill set. Then, as you bring in extra income, you can use that extra income specifically for paying down your existing debt.
Payment History Trouble
What is your overall payment history? First, lenders will look at the payment history regarding your mortgage loan. They need to see if you have a history of late mortgage payments or if you have frequently missed payments. Lenders also look at your other revolving debt. Whether you have credit cards, student loans, or any other types of accounts open, they will see your payment history as well. After all, when you borrow a home equity loan, while it's borrowed against your existing home value, you still have to pay that back.
Low Credit Score
Before you apply for a home equity loan, it's a good idea to check your credit report. First of all, you want to see if there's anything on your credit report that could be a red flag. Make sure that your credit report only contains accounts that you've opened. Check for things such as account statuses. If you know you've paid off and closed an account, but it still says that it's open or hasn't accounted for paid installments, call the Credit Bureaus.
In addition to your overall credit report, you need to see what your credit score is. Bad marks on your report can drag down your credit score. Ideally, you should have a credit score of 650 or over to apply for a new loan, according to Investopedia. Similarly, according to CNBC, the better your credit score is, the lower the interest rate that you'll have to pay. So, if your credit score is closer to 800, you're more likely to pay 3% as opposed to 7% for your loan interest rate upon approval.
When you pull your report, you should take steps to raise it before you apply for your equity loan. The easiest way to do so is to ensure you make timely payments going forward over the next few months. Check your credit report monthly going forward to check all of your payments are accounted for. See how much your score rises. When it gets to a high enough number, then you can apply for your loan and increase your chances of approval.
Home Value
You should also be realistic about your home value when applying for home equity loans. Home values can fluctuate, and the past few years of the economy have seen many homes do just that. Just because your home was worth a certain amount last year doesn't mean it's still that high. Therefore, if your home has decreased in value, it can affect how much equity you actually have available to borrow against.
Additional Cost
Did you know home equity loans can have additional fees? When you get one of these loans, you must prepare to pay closing costs and origination fees. Some also come with annual fees until you get the loan paid off. Despite the loan amount you're approved for, you'll have to pay a greater amount back once all of these other fees and interest rates are added. The final cost may be more than you initially planned.
No Co-Signer
It may be hard to get approved for home equity loans when you don't have a cosigner. Even if you don't have late payments or bad marks on your credit report, lenders may feel you don't make enough money to qualify for this loan on your own. When you need a home equity loan, you may need to see if someone can cosign for you. Being a cosigner on someone else's loan is a major responsibility, so don't be surprised if you have a hard time finding someone. If you can't find such a trustworthy person, your chances of getting the loan may be reduced unless you also have collateral.
Lack of Collateral
When you apply for an equity loan, having some form of collateral can make your approval easier and faster. Collateral is any physical asset the bank could claim in case you default on your loan terms. Your collateral can include your home, land, investment property, car, art, jewelry, etc. For example, maybe you have a vacation home that you could use as collateral for an equity loan.
Spending Habits
Be mindful of your spending habits as much as possible before you apply for home equity loans. After all, lenders will likely check your banking statements to see how much money is in your account. Therefore, if you're spending excessive money shopping for entertainment and other things you may not need at the moment, it may not be a good reflection on your financial stability. Plus, if spending habits involve using a lot of credit cards, you may charge up those balances, which will also be a red flag for a home equity lender. Play it safe and put yourself on a budget as much as possible before you approach an equity lender. Plus, when you take on an equity loan, it'll be another bill you must plan to pay back every month. So, you'll need to adjust your budget accordingly if you take this debt on.
Home equity loans can be a good resource for anyone who needs some emergency funds and wants to reinvest in their home, pay for a business, or other personal items. Your home equity loan allows you to take advantage of your current home value. However, even though you're technically borrowing against your own property, there's no guarantee you'll get approved. Issues such as your amount of debt, income, payment history, and lack of collateral are factors banks use to determine whether you get approved. Even if you get approved, you may not get the amount you prefer. If you have any questions about the home equity approval process, don't hesitate to contact our team today. Our banking firm handles wealth management and different types of loans, and we look forward to seeing you during a consultation. Call us at Chemung Canal Trust Company today to learn more!