The Home Equity Loan Zone

Often, when your lender scrutinizes your loan application for a new home or piece of property so finely that it is finally turned down, it can be very distressing. If this happens, you should be able to understand just why such a decision was taken and do what you can to remedy the situation. The cause for rejection given below will help you understand just why it happens to some people.

Causes for rejection:

The appraised value is far too low: Your lender perhaps found the ratio of the loan amount to the sale price or the appraised value of the property to be substantially lower than the purchase price or loan-to-value (LTV) ratio. Or perhaps the LTV is higher than your lender is allowed to approve. Then, perhaps you have applied for 90-95% of the purchase price as the loan amount. A low appraisal will then make your loan request far too large.

If the seller”??s price of the property far outstrips the prevailing rates in your locality, you would be best advised to renegotiate the price with him so that it conforms to the prices in the area. It should also be one which your lender would not refuse in order to pass your loan request. If this can”??t be done, it might be a better idea to accept a smaller loan amount, and pay the balance from your personal funds.

Insufficient funds: When your lender goes through your financial information and you”??re verification of deposit, he will find that you do not have enough funds to make the necessary down payment and cover closing costs. Even if these funds do not come from a loan, a gift could go a long way. Alternatively, you could ask the seller to take back a second mortgage on the property. This would help lower your down payment or get the seller to pay some of the closing costs, perhaps the origination fees. After all this, you could ameliorate the situation by just waiting in the wings, while you begin a savings scheme.

Do you have insufficient income? Lenders will refuse your loan application if they find that the mortgage payment on your property exceeds 28 percent of your monthly gross income. In addition, if your total debt including mortgage payments and other installments exceed 36 per cent, you stand to be refused. The figures are higher for FHA loans. But the situation can improve for you if your credit card record is good and you can prove that you already are carrying a huge household expense including rent or mortgage payments, perhaps your lender will swing his decision in your favor. This is just why you need to make a clean breast of your income and expenses while making an application.

Up to your eyes in debt: Often, lenders don”??t reject applications solely because of the amount of debt they carry on their heads. It is also the many credit cards they possess and revolving credit accounts with proof of rising account balances that come close to the limit prescribed. Such information is detrimental if you are out to prove your creditworthiness. To remedy the situation, you will need to pay off as many of your debts as possible and then reapply for a loan.

Poor credit history: What can be more devastating than to have your loan request turned down due to a history of poor debt repayment habits? If your lender sees that you have a history of making late charges often, owing amounts to the bank or insolvency, he”??s hardly likely to pass a loan application for purchase of property. Your lender is surely not going to be tolerant of a bad credit record. Even if you have had a low loan-to-value ratios and debt ratios, you cannot wipe out a history of poor credit.

Rejection is not the end of the world: Just because a lender rejects your loan application doesn”??t mean you can never own property in all your life. You can take corrective steps to improve your chances of acceptance. But if you work steadfastly at it, you can work a way round your problems. Find out why your loan application was rejected and work towards loan acceptance.

Home equity loan (HEL) ads are all over the place. It seems everyone is touting them as “the perfect way to consolidate debt.” And many people are responding. Between 1997 and 2004, according to Federal Reserve statistics, home equity loans and home equity lines of credit jumped from $416.2 billion to $826 billion. Actually, home equity loan debt is now far greater than credit card debt. Apparently, the ads work, but do home equity loans work?

Of course, you can switch high interest credit card debt for far lower home equity rates and even, possibly, get the chance to deduct on your state and federal incomes tax some of the interest you pay. But aggressive lenders fail to warn homeowners of the serious risks involved with home equity loans.

The most serious questions you need to ask yourself before getting into a home equity loan is “Will I suddenly now be able to control my spending and manage my money effectively? Or am I just going to max out my credit cards once again after I pay them off?”

Well, no matter how good your intentions are, the chances are you won’t clean up your money act. Very few people do. In a recent survey done by Brittain Associates, an Atlanta research firm, nearly two thirds of homeowners who consolidated their debt with home equity loans just ran up their credit cards once again in two years.

And many of these home equity loans were made to people already under financial stress because of low incomes and/or bad credit. Ten years ago, in a much more conservative mortgage market, most of these “subprime” borrowers would not have been considered creditworthy by lenders. They wouldn’t have qualified for a loan, even if they did put up their home as collateral.

But, in todays much more competitive and aggressive mortgage industry, it seems like anyone with some home equity can borrow against it, no matter what their income or credit status is. Depending on who you are, this liberality can be either good or bad.

It can be good, if you have the discipline to manage your spending habits. However, if you don’t have the discipline, you could end up losing the roof over your head. And, if you don’t believe the risk of foreclosure is serious, consider this. Foreclosures are on the upswing from coast to coast. In some states, like California, they’ve actually doubled in the past year.

And debt consolidation home equity loans to less than prime borrowers is a major cause of this increase in foreclosures. Subprime mortgage loans are very risky. At any one time, about 16% are delinquent and over 4% are in actual foreclosure. These default numbers are predicted to go up even higher in the near future.

Why? Because, in order to keep their payments down, many subprime borrowers chose to go with low introductory adjustable rate mortgages. As these ARMs revert to higher fixed rates over the next couple of years, some of these borrowers are going to see their monthly payments increase by as much four or five hundred dollars, which is more than they can probably handle.

If you’re thinking about getting a home equity loan to consolidate debt, you better be smart and be careful. They only really make sense if you’re absolutely confident you’re not going to just run up more debt all over again. And most conservative financial advisors don’t recommend HELs for consolidating debt. Instead, they believe home equity loans should be used only for such things as capital home improvements, emergency medical bills and educational expenses.

There are lots of other safer ways to pay off your credit card debt, so think twice before taking a home equity loan. That is, if you want to keep the roof over your head.

Using the equity in your home as collateral for a loan to pay off unsecured credit card debt may be a good idea. It’ll probably get you a lower interest and some tax benefits.

But home equity loans are not without risk. If you’re unable to control your spending and just max out your cards once again, you could end up losing the roof over your head. So it might be to your benefit to consider other options first.

Actually, if you’re in debt, the best place to start digging out is to stop spending. Financial self-discipline can do wonders if you’re in money trouble. Hide your credit cards for a while and begin paying for purchases only in cash. And, if you can’t afford something, don’t buy it. At least not now.

A second option is to find a credit card with a low “fixed” rate. Make sure it’s not one with a low introductory rate that’s just going to go up in three to six months. Then transfer your other credit card balances to this less costly card.

Another excellent option is to pay off higher interest rate cards first. For example, let’s say you have three cards and only $100 to put towards paying off your debt each month. Make only minimum payments on the lower interest cards and apply the rest of your available cash to the higher interest card. As soon as you pay off that card, repeat the same process with the other two cards. This is one of the most highly recommended ways to get out of debt.

And, finally, if you’re so deep in debt it’ll take you five years or more to pay your way out, a home equity loan may be your best option. Because of lower interest rates and tax benefits, it would most certainly help lower your cost of borrowing.

But be on your toes, because there are a lot of predatory lenders out there willing to promise you anything – low monthly payments, low interest rates, no credit checks, no appraisals, you name it – just to get their hands on your home equity. They’re a major reason why foreclosures are at record highs all across the country.

If you decide to go with the equity loan option, make sure you do your homework first. Read all the ads and check out all your options. Get as many mortgage offers as you can to compare the fine print. And, if you’re hot sure what you’re doing, get some help. Ask a knowledgeable friend or relative you can trust to go over the details of your mortgage before you sign any papers.

Be safe rather than sorry and you can probably pay off your debts, save some money and keep your home – your most valuable asset.