Getting a loan for your home is a difficult process, given a home loan application needs some amount of effort to get approved. There are some requirements which you must fulfill to increase your chances of getting approved to make the mortgage application a successful one and help snag your first house.
The original mortgage loan is then paid by the borrower for a period, with some additional charges or interests depending on the lender’s standard operating procedures. While this may seem like a good idea, you may sometimes find yourself in a situation where you need more money to pay for certain bills like medical bills, home repairs, education, and many others.
The good news is, you can opt for a more immediate solution via a home equity loan, a type of secondary loan where a borrower can use the equity in his or her home as collateral to the amount that he or she intends to borrow. Typically, the amount of the equity loan is not determined by the borrower rather, it is identified by the property appraiser of the lending party who determines the value of the property.
In consequence, the appraised value of your property is the amount that can be granted to you by the lender. There are several factors that a lending party must consider on top of the value of the property, and it is apparent that as a borrower, you know what these factors are to ensure that you will get the approval of your intended loan.
As mentioned earlier, a home equity loan may be used for emergency expenses or payment for basic needs. And identifying how you intend to use your borrowed money is essential for you not to get into a bad financial situation in the future. Here are some scenarios which most homeowners use the equity in their home for:
1. Major Purchases – a home equity loan can be utilized on the main purchases which involve vast sums of money. These investments may include buying a new vehicle or financing a new property, both of which require large amounts of money which can be obtained from a home equity loan.
2. Renovation – when you are not satisfied with your current house design, getting some improvements or upgrades wouldn’t hurt, especially if you observed the fair market value of properties in your area is on the rise. Use this as leverage to apply for a home equity loan to improve your house.
Most of the expenses for home improvement go to kitchen or bathroom renovation, since these areas are the ones which require major overhauls. Regardless, a home equity loan may be used for home improvements with various levels of necessity, ranging from simple home repairs to the total renovation of your entire home.
3. Payment for Other Debts – some people may have accumulated large amounts of credit card debt or outstanding credit with other creditors. With this in mind, borrowers usually face danger in their financial situation, in a sense they accumulate large amounts of debt from multiple, smaller ones.
As a result, payment for each of these debts becomes difficult to track, and forgetting to pay for the amount owed, can find you in situation with an inability to pay, which can thereby tarnish your credit score in the future. Some borrowers use their home equity loan to pay off all of these debts to prevent this from happening.
4. Investment Capital – some business ventures simply cannot sit long as ideas, and sometimes, your savings may not be enough to cover the expenses or to reach the minimum investment capital for your startup venture. In this regard, an equity loan for your house can be used as an additional investment capital to boost your startup funds.
5. College Education – your child’s college education may get too expensive for you to pay for in just one shot. Some parents decide to get an equity loan for their property in order to fund the education of their kids.
As a word of precaution, parents should make sure they do not foreclose their mortgage, especially if the one they’ve mortgaged is their one and only property. The last thing that you should want to do is to move in with your college graduate because you have just lost your home!
6. Emergency Fund – others use a home equity loan as an emergency fund stored in bank accounts. This may seem like a good idea, and as advice, you need to define what these emergencies are. Stick to these definitions and make sure that you don’t spend it on “emergency” funds that aren’t true emergencies.
The things mentioned above are only some of the uses of home equity loans. In this regard, getting home equity loans can become easy, as long as you know what the requirements are and as long as you’ve made sure you’re qualified for such a loan, then your application will be good as approved.
You must learn what is needed for a home equity loan on top of knowing, in which scenario, most homeowners use the equity in their home.
Like any other loan application, applying for a home equity loan entails a borrower to fulfill specific requirements to have his or her loan approved. Some of the requirements for home equity loan application may include documentary requirements and bank statements. Here are some of the things you need to know to qualify for the said loan:
1. An equity loan for your home may require high capital from the end of the borrower. Many creditors have a particular loan-to-value (LTV) ratios, where in most cases, the LTV required is around 85% meaning; a borrower must have at least 15% of the equity left for their home’s mortgage to qualify. LTVs may also vary depending on the kind of property that you are placing the loan under.
2. Your creditor also scrutinizes your ability to pay for it. Ideally, your income should be significantly higher than your debt, and most lenders calculate this by getting the percentage value of your income against your debt. If you get 45% or lower, chances of getting your loan approved will be high.
In this case, the lower the percent value, the better. Lending parties sum up the total payments you need to pay for your house, including additional fees. As they do so, they compare their computed monthly amortization to your monthly income.
3. You must have good to excellent credit score rating. Credit score ratings involve your history of paying off your previous bills and debts and ideally, a good or excellent credit score is what you should aspire for.
A good to excellent credit score means that you must have at least a score of 700 to get your loan approved. With that, a credit score rating may indicate how worthy you are of receiving a degree of credit, and as mentioned earlier, a score of 700 and above is deemed ideal.
With this information in mind, you should try to get a high equity or LTV ratio, a reasonable income to debt percentage, and a good credit score to qualify for an equity loan for your house. At this stage, it also pays to know what the requirements of your prospective creditor, in order to ensure that once you qualify, your transaction will run quickly and smoothly.
Some sources may come up with a comprehensive list of many types of home equity loans, but commonly, there are two main types of home equity loans, and each of these types may vary depending on your intended term which you want to achieve.
There are several factors you must consider before you select the suitable loan term for you, and as mentioned earlier, these factors include a monthly payment, interest rate, the calculated ratios, and at which term you are best qualified. The main types of equity loans for your home you can choose from include:
1. Fixed-Rate Loans – with this type of loan, the creditor grants the lump sum amount of the credit to the borrower. The borrower must then pay for this sum at an agreed fixed payment and interest rate over a period of time.
2. Home Equity Lines Of Credit (HELOC) – HELOCs have a fixed term just like fixed-rate loans. What sets it apart from the other home equity loan is the total loan can be varied, much like how a credit card works. You can vary the amount you withdraw per month, and the interest rate will also vary along with it.
Like a credit card, HELOCs also have a spending/withdrawal limit, and once the term expires, the remaining amount you have borrowed must be repaid in full.
These are only some of the common types of equity loan for your home which most creditors offer. The other types of home equity loans are mainly based on how you intend to spend your borrowed amount. Regardless, these sub-types fall under either of the mentioned types earlier, and it is up to the borrower which term he or she wants to have his or her loan classified under.
Some of these other home equity loan types include:
1. Equity Seconds – where you take possession of your property, and the equity which you currently have will serve as your loan collateral.
2. Debt-Consolidation – where you use the home equity loan to pay off your smaller debts (as mentioned earlier).
3. Home Improvement – where you use your loan to improve your home or upgrade its structures, in addition to minor repairs.
As you can see, the other types of loans all depend on how you intend to spend them. Regardless, these loans may either fall under Fixed-Rate Loans or HELOC, depending on the policy of your creditor.
A home equity loan may be challenging to get, especially when it specifies a list of qualifications from the end of the borrower to qualify for the said plan. Before you apply for a home equity loan, you must first identify when you need it, that is; you must have a goal in mind on what you intend to use the money for to prevent suffering from fund mismanagement in the long run and place yourself further in debt.
Several of the listed scenarios you may consider in getting a home equity loan, include home improvement or renovation, debt consolidation payments, college education, investment capital, and for major purchases.
These scenarios may also indicate which type of loan term you should try for and these terms are either the fixed-rate loan, where you get a fixed payment and interest rate over a period of time, or HELOC, where the amount you can withdraw may vary along with the payment and interest rates, although a limit is imposed. As you apply for a loan, it pays to know what things you need to remember to qualify for the loan.
These qualifications include your ability to pay off the debt, that is, the percent ratio of your income to the debt wherein the lower the percent value, the higher the chances of getting your loan approved are. Other qualifications include having a big loan-to-value ratio, given that this indicates how you were able to pay for your previous mortgage and also, having a good to excellent credit score rating.
Fulfilling these qualities can help you get the loan and use it on whatever you need it for. At the end of the day, an equity loan for your home may be a good idea, as long as you know what you intend to use it for.
Avoid mismanaging your funds by not having set a goal in mind on what you need the money for. Focus on your goal, and once you’ve achieved it, prioritize on paying off your debt to prevent it from getting too imposing and to prevent placing yourself in an unfavorable financial condition. Follow us for more tips and lifehacks today.