Home Equity Loans and The Housing Market
Sharon L. Secor
November 18, 2007
As recent headlines indicate, housing values are taking a tumble throughout the nation, something that can have an affect on home equity loans. Home equity loans are tied to the value of the home, which is why falling home values can affect home equity loan potentials. That doesn't mean that a home equity loan is out of the question or that it is not the right financial move in some circumstances. What it does mean, however, is that changes are taking place in that realm of lending that need to be factored in when making borrowing decisions.
The Changing Terrain Of Home Equity Lending
Some of the top lenders in the home equity lending field have recently announced that they are making changes in their lending processes. In response to recent market conditions, Wells Fargo and Company made public its decision to significantly reduce the number of stated income home equity loans that it would be making. Only in-house lenders will be able to accept stated income applications after Tuesday, November 20, 2007, as Wells Fargo is removing this option from the hands of independent brokers. JP Morgan Chase and Co. also moved to tighten their home equity lending standards. There are lenders on every level of the industry that are quietly moving towards restricting this type of lending to those with credit scores that indicate less of a risk to the lender. Many smaller lenders have completely eliminated home equity lending altogether, stated income or not, good credit or bad.
In addition to tightening lending standards, with the home values in many parts of the nation taking a hefty hit, the amount of money that lenders are willing to extend for a home equity loan is decreasing. When times were a bit more flush, with cash and credit flowing more loosely, homeowners could borrow higher percentages of the value of their homes than they can today. Now, lenders are considering not only the current fall in the value of homes, but also trying to calculate just how much the value of the home may decrease before this corrective cycle in the housing market comes to an end. Thus, many home equity lenders are reducing the percentage of home value that they are willing to lend, in an attempt to avoid a situation in which the borrower defaults, owing more on the house between the mortgage and the home equity loan than it is worth.
What Home Equity Loan Seekers Can Do
There are two basic ways of borrowing against home equity. One is an outright loan based on the equity in the home, and the other is a line of credit that is tied to home equity. Although home equity lending standards are tightening, there are home equity loan opportunities out there. It is a matter of planning and preparation, as well as being willing to take your time to find the right borrowing opportunity.
The first step in any loan decision is to be sure that, in fact, a loan at this time is the right financial move for the situation. With the economy what it is today, perhaps it is also time to tighten up borrowing standards as well as lending standards. Tightening up borrowing standards means being sure to weigh out the difference between consumptive debt and productive debt, between needs and wants. Be sure that the purpose for which you are seeking a loan really merits taking on an additional debt and is worth the cost of credit, when measured by what you'd spend if you just saved up for your particular goal.
If you are approaching your potential home equity loan with some foresight, meaning it is not a matter of right now, but rather something you are seeking with a bit of time to play with, then you can start working immediately towards getting better terms and conditions. You can do that by working towards improving your credit score by reducing debt. For example, as Mark Barnes wrote in an article for Lenders Mark, just doubling your monthly credit card payment can make a significant dent in your credit card debt. Working to reduce your debt-to-income ratio will make you look better to prospective lenders when the time comes that you are ready to make your home equity loan application.
You may also want to avoid applying for other credit during your preparation period for applying for a home equity loan. That way, lenders don't see you as seeking a variety of forms of credit and then suspect that you are doing so because you are in financial trouble. After all, with adjustable rate mortgage interest increases and other current financial situations, there's a lot of fiscal trouble going around these days. If you are planning on applying for a home equity loan in the near future, bear in mind all of those little things that can influence lenders. For example, you may want to put off switching jobs or making similar changes in your life that could affect how your fiscal situation looks to those seeking clues to your credit worthiness.
While home equity lending is getting tighter, there are still opportunities available for borrowing. Understandably, lenders today are going to show a preference for making loans to borrowers that they believe show the least potential for defaulting on their loans. However, that isn't necessarily a bad thing for the borrower, because that attitude can act as a measure that helps borrowers make better decisions and become more prepared prior to making a loan application, something that is sure to be a long-term benefit not just for the lenders, but also for the borrowers.
The Changing Terrain Of Home Equity Lending
Some of the top lenders in the home equity lending field have recently announced that they are making changes in their lending processes. In response to recent market conditions, Wells Fargo and Company made public its decision to significantly reduce the number of stated income home equity loans that it would be making. Only in-house lenders will be able to accept stated income applications after Tuesday, November 20, 2007, as Wells Fargo is removing this option from the hands of independent brokers. JP Morgan Chase and Co. also moved to tighten their home equity lending standards. There are lenders on every level of the industry that are quietly moving towards restricting this type of lending to those with credit scores that indicate less of a risk to the lender. Many smaller lenders have completely eliminated home equity lending altogether, stated income or not, good credit or bad.
In addition to tightening lending standards, with the home values in many parts of the nation taking a hefty hit, the amount of money that lenders are willing to extend for a home equity loan is decreasing. When times were a bit more flush, with cash and credit flowing more loosely, homeowners could borrow higher percentages of the value of their homes than they can today. Now, lenders are considering not only the current fall in the value of homes, but also trying to calculate just how much the value of the home may decrease before this corrective cycle in the housing market comes to an end. Thus, many home equity lenders are reducing the percentage of home value that they are willing to lend, in an attempt to avoid a situation in which the borrower defaults, owing more on the house between the mortgage and the home equity loan than it is worth.
What Home Equity Loan Seekers Can Do
There are two basic ways of borrowing against home equity. One is an outright loan based on the equity in the home, and the other is a line of credit that is tied to home equity. Although home equity lending standards are tightening, there are home equity loan opportunities out there. It is a matter of planning and preparation, as well as being willing to take your time to find the right borrowing opportunity.
The first step in any loan decision is to be sure that, in fact, a loan at this time is the right financial move for the situation. With the economy what it is today, perhaps it is also time to tighten up borrowing standards as well as lending standards. Tightening up borrowing standards means being sure to weigh out the difference between consumptive debt and productive debt, between needs and wants. Be sure that the purpose for which you are seeking a loan really merits taking on an additional debt and is worth the cost of credit, when measured by what you'd spend if you just saved up for your particular goal.
If you are approaching your potential home equity loan with some foresight, meaning it is not a matter of right now, but rather something you are seeking with a bit of time to play with, then you can start working immediately towards getting better terms and conditions. You can do that by working towards improving your credit score by reducing debt. For example, as Mark Barnes wrote in an article for Lenders Mark, just doubling your monthly credit card payment can make a significant dent in your credit card debt. Working to reduce your debt-to-income ratio will make you look better to prospective lenders when the time comes that you are ready to make your home equity loan application.
You may also want to avoid applying for other credit during your preparation period for applying for a home equity loan. That way, lenders don't see you as seeking a variety of forms of credit and then suspect that you are doing so because you are in financial trouble. After all, with adjustable rate mortgage interest increases and other current financial situations, there's a lot of fiscal trouble going around these days. If you are planning on applying for a home equity loan in the near future, bear in mind all of those little things that can influence lenders. For example, you may want to put off switching jobs or making similar changes in your life that could affect how your fiscal situation looks to those seeking clues to your credit worthiness.
While home equity lending is getting tighter, there are still opportunities available for borrowing. Understandably, lenders today are going to show a preference for making loans to borrowers that they believe show the least potential for defaulting on their loans. However, that isn't necessarily a bad thing for the borrower, because that attitude can act as a measure that helps borrowers make better decisions and become more prepared prior to making a loan application, something that is sure to be a long-term benefit not just for the lenders, but also for the borrowers.
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