Despite Current Market Conditions, Home Finance Loans Are Available

As you no doubt know, the housing market has been hit hard by current economic conditions. During the boom of the early 2000s, Americans took out home equity loans and home equity lines of credit to the tune of almost $180 billion, money that was used to pay off other debts, for home improvement, to purchase big-ticket items such as cars and for college tuitions.

At its peak in 2006, lenders were approving home equity loans and home equity lines of credit of up to 100 percent and or more of a house’s value, while holders of a home equity line of credit were using the fund to purchase vanity items such as boats and luxury vacations.

But as the market for home equity loans and home equity lines of credit fell, interest rates rose steadily. Home equity loan rates rose from approximately 6.7 percent in 2005 to a current average of about 8.2 percent. Meanwhile, home equity lines of credit rose from 4.60 percent to a current average of 8.6 percent. Add to that the devaluation of many homes (currently, more than 23 percent of homeowners have a negative equity in their houses) and a crisis in American housing was born.

All of this has made it slightly more difficult for homeowners with poor or bad credit to secure a home equity loan or a home equity line of credit or manage the payments on their current loans. Lenders have become wary of approving loan applications as easily as they did in the past and have tightened their regulations. In addition, they have begun giving close scrutiny to the value of homes.

But despite this belt tightening, experts say that the difficulty in securing a home equity loan or home equity line of credit is really a return to the way things used to be conducted. Indeed, the current slowdown in approving home equity loans and home equity lines of credit is not to a fear on the part of lenders, but a reduction in the number of qualified borrowing candidates. Statistics state that the number of homeowners with less than 20 percent equity in their homes (the traditional minimum for approving a home equity loan or home equity line of credit) has risen sharply.

One lender has stated, “Most of the issues with issuing home equity loans and home equity lines of credit are on the qualification side of things. … You really need an 80 percent loan-to-value max. It’s not that the cash has evaporated, it merely being redistributed.”

But while the current home equity loan and home equity line of credit situation may appear desperate for some, there is a way to navigate the market and secure a home equity loan or home equity line of credit even for those with poor or bad credit.

First, modern borrowers might want to consider applying to smaller lending institutions. Larger banks have tightened their belt when it comes to issuing home equity loans, but smaller banks and lending companies have picked up the slack. But they haven’t totally relaxed their rules and are scrutinizing home appraisals closer that before, in some cases requesting more than one appraisal.

Next, experts recommend working to boost your credit score. The better the credit score, they say, the better chance a borrower will have of getting a home equity loan or home equity line of credit. Borrowers who have poor or bad credit will no doubt have to work on this aspect of their financial profile, but it will make getting approved for a loan much more likely.

Borrowers should also be prepared to confront the realities of today’s lending market. Depending on where you live, the value of your home may have dropped sharply or, at best, remained the same. For instance, residents of Texas may have been hand-cuffed by their state’s laws that hindered homeowner’s ability to take equity out of their homes, but that fact has kept many Texas homeowners from taking out exorbitant home equity loans and home equity lines of credit, then falling victim to the drop in home equity rates.

On the other hand, home equity loan and home equity line of bad credit holders in other states suffered big drops in the value of their homes and now find it difficult to get approved for a loan or line of credit, regardless of their credit score.

Experts also recommend shopping around for the best rates and terms and make sure you can afford it. Homeowners, they say, should keep rising property taxes, insurance, upkeep and other common and unexpected expenses in mind when determining the amount of the home equity loan or home equity line off credit.

And if you already have a home equity loan or home equity line of credit, the experts recommend reviewing it with an eye toward refinancing into a fixed-rate option before the rates rise. Be wary of any prepayment penalties.