Does home equity help with loan approval?
Understanding the importance of equity
For those considering a home loan or a home refinance, it helps to understand what impact equity has on home loan approval. While it may be tempting to put as little as possible down when you are purchasing a home, or to take the maximum amount of home equity out of your home, there are dangers to doing this.
In addition to higher interest rates (the higher the loan to value, the more you’ll pay) you may also have to purchase Private Mortgage Insurance (PMI) if the loan to value exceeds 80 percent. Make sure you understand what you are getting yourself into!
First time home buyers beware
For a first-time home buyer, coming up with the required down payment is the most challenging part of the process. The amount of the down payment impacts numerous aspects of the loan process including loan-to-value limitations and whether or not a lender requires a borrower to escrow their property tax payments and their property insurance payments. In addition, borrowers who face credit challenges will likely have a harder time getting a loan unless they pay a larger down payment. Some borrowers ask their lenders at the outset what their requirements are and how much does equity count in loan approval processes used by that lender.
Based on the property value, loan-to-value ratios are typically allowed to be as high as 95 percent. However, the larger a down payment, the more likely a borrower is to have a lower interest rate, avoid private mortgage insurance (PMI), and have fewer problems getting approved for a loan if they have had previous credit problems. Lenders evaluate mortgage applications as a whole; lenders tend to look at the entire picture and not just a single snapshot of any information provided. FNMA states, “a downpayment of 20 percent or more of the home purchase price demonstrates your commitment to long-term home ownership and provides you with immediate equity in a new home.”
Loan considerations you need to know
Lenders review various factors in determining whether a borrower is creditworthy. As part of this review, the lender decides if the loan that is being requested falls within the guidelines that they establish. When there are any problems with an application including late payments, lack of work experience, or other potential blemishes, the lender can then assess how much equity counts in loan approval processes based on internal formulas. As a borrower looking for a mortgage loan, one consideration is how much a larger down payment reduces monthly mortgage payments. Some lenders reduce the interest rate based on the amount of equity that is left in the property. There are several reasons for this including:
- The ability of the borrower to later use the equity to borrow added funds for repairs or upkeep In the event of foreclosure, the equity helps the lender recoup more of the value of the loan
- A larger down payment means that the borrower will have borrowed less thereby making monthly payments smaller.
All of these factors are taken into consideration when an underwriter reviews a loan for approval. This is when the equity value of a home is considered. While a higher equity position does not guarantee that a loan will be approved, it does play a significant role in the home loan process. When you are considering a home refinance, contact Core Mortgage Financial. We’ll help you make sure that you get the right home equity loan or refinance loan available.
Tools you can use
There are countless tools that are available to those who are considering buying a home. These tools are free and can provide potential home buyers with much needed education. Buying a home is a lifelong commitment, you will be paying your mortgage for years to come (usually 30). Don’t get into something you don’t understand.
- Free Credit Report – Don’t fall for these gimmicks that offer you a “free credit report” with a subscription to their credit monitoring service. Consumers are entitled to a free credit report annually. This helpful article will tell you how to apply for your free annual credit report today. No credit cards needed!
- Understanding home equity – For those who already own a home, taking a home equity loan may be an option worth exploring. If you are considering a home equity loan make sure that you know what to expect. This helpful guide about borrowing money against your home will walk you through the information you need to know.
- Understanding the home buying process – Fannie Mae is the largest mortgage loan insurer in the United States. They provide a great deal of free education for information includes buyer education, avoiding foreclosure and predatory lending information.
- Saving for your down payment – Saving money for your down payment for a new home purchase is never an easy task. However, there are some creative ways to save for house down payments. This directory of resources can be very beneficial, especially for first time home buyers!
- Understanding loan to value – One of the terms you’ll hear frequently during your home buying or refinancing is loan to value. It is helpful to understand how to calculate loan to value ratios. In the long run, having a basic understanding of this concept will be very helpful.
Call Core Morgage Financial and let our senior loan originators guide you through the loan process. We are dedicated to assist our borrowers and give the BEST possible service in town.
Helpful Terms Defined:
Mortgage: Collectively, the security instrument, the note, the title evidence, and all other documents and papers that evidence the debt. A Mortgage is a loan secured by a lien on real estate held in fee simple or on an acceptable leasehold estate. A loan made for the purpose of purchasing, building or rehabilitating real property, and secured by that property. A pledge of real property as collateral for payment of debt. The term is also used to describe both the mortgage (security instrument) and the promissory note evidencing the debt, which includes the terms of the debt’s repayment.
Note: The evidence of indebtedness for a mortgage loan. A note is the instrument evidencing the indebtedness secured by a security instrument that sets forth the amount the owner owes the lender and the manner in which the debt is to be satisfied. The note establishes the payment terms, conditions under which prepayments may be made, and the lenders rights in the event of default. A written agreement between the mortgagor and the mortgagee specifying the amount and terms of repayment for a loan.
Disclaimer: This article is for informational purposes only. NMLS #849597