Find Existing Homes
from REALTOR.com®

or

State AK AL AR AZ CA CO CT DC DE FL GA HI IA ID IL IN KS KY LA MA MD ME MI MN MO MS MT NC ND NE NH NJ NM NV NY OH OK OR PA PR RI SC SD TN TX UT VA VT WA WI WV WY

By BankingMyWay Staff

If you owe less on your house than it's currently worth, then a home equity line of credit may be available to you, but before you apply, be sure to know the facts.

Simply stated, home equity is the financial stake an owner has in a home or the home’s value minus any outstanding debt. Home equity accrues in two ways—appreciation and payments on the loan principal.

One way to access the equity in your home is to take out a home equity line of credit (HELOC). A home equity line of credit is a revolving account in which a lender allows the borrower to access funds up to a certain percentage of your equity. HELOCs are a type of second mortgage, and they are secured by real property. The lender provides the borrower with either checks or a credit card to access the funds in the line of credit. The borrower continually makes payments to replenish the balance. When the term of the HELOC ends, the balance must be repaid in full.

In the past, lenders were eager to supply home equity loans because home values were consistently rising and HELOCs were a way to earn good returns with a secure investment. The rapid decline of home values and the overall economic crisis, however, have completely changed the lending environment. Recently, HELOC delinquencies have risen sharply as have foreclosures. Because HELOCs are second mortgages, HELOC lenders often cannot recover funds through a foreclosure.

As a result, it is much harder to qualify for a HELOC today than it was a year or more back. Most lenders now require borrowers to have at least 20% equity remaining in their homes after the HELOC to even be considered. In many cases, even greater equity is required. Interest rates have also risen significantly over the last year. In the Home Equity Section of BankingMyWay.com, you can find and compare rates in your area.

In order to qualify, borrowers must also have low debt-to-income ratios. In many cases, a borrower’s total housing-related debt including mortgage payment, property taxes, homeowner’s insurance and the potential HELOC payment must not be more than 28%.  Lenders also look at a borrower’s other financial obligations including car loans, credit card payment loans and court judgments. Most lenders want a borrower to have no more than 36% total debt-to-income in order to qualify for a HELOC.

In addition to low debt-to-income, borrowers need to have a high credit scores. The standard for credit scores has also risen thanks to the current economic conditions. It used to be that borrowers could qualify for most loan products at the prime interest rate with a credit score as low as 620. Currently, a credit score of 760 or higher is required to land in the top tier of the Fair Isaac Corporation (FICO) rate chart. Even that score isn’t high enough for some HELOC lenders, however.

A borrower’s employment history is also scrutinized when applying for a home equity line of credit. Lenders check pay stubs, W-2 forms and verify employment. Some lenders require 2 years of steady employment.

Even those who have established HELOCs are feeling the shift in the lending environment. Many are finding their lines of credit frozen, reduced or closed outright. Lenders are now tracking borrower’s debt-to-income ratio, credit behavior and equity amounts. If any of these variables change, an existing HELOC can be negatively affected regardless of the current standing of the account. For example, if a home prices in a borrower’s area sharply decline to the point where the borrower no longer has at least 20% equity, a lender might decided to freeze, reduce or close that account.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.