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The short answer is yes. Your home equity loan application can be denied for a number of different reasons. The main reasons for getting declined when you apply for a home equity loan are:
- Insufficient home equity
- Poor credit score
- Unreliable source of income or employment history
High debt-to-income ratio
When comparing home equity loans to other options such as refinancing, a big factor in the decision is whether or not you’ll be able to save a significant amount of money. When it comes to trying to decide between home equity and cash-out refinancing, there are pros and cons to both sides. Although there are higher closing costs for refinancing, there are usually lower interest rates and you’ll be able to save in the long term when compared to a home equity loan.
If you have excellent credit and are able to find a home equity loan with a low interest rate, there are many other advantages to applying, but generally, cash-out refinancing is going to be less expensive than other options.
A home equity loan allows you to borrow a large sum of money against the value of your house with relatively low interest rates, so it does come with some larger closing costs than other types of loans.
Some examples of items included in the closing costs include:
- Application fee - Application fees are standard when applying for any assistance, whether that be a home equity or conventional loan.
- Appraisal fee - An appraisal is required when you apply for any home equity or HELOC loan program because the amount that you are awarded is based partially on the amount of money that your house is worth. The lender is going to want an accurate and recent estimate to base their calculations on, so it’s important to plan on having an appraisal done on your home.
- Credit report fee - Depending on the lender, you may be required to pay a fee for running a credit report.
- Title search fee - A title search is a search that is run to make sure that you are the owner of your home before awarding a loan to the borrower.
- Attorney and notary fees - If you need a lawyer's assistance in drawing up any paperwork or need anything notarized, make sure to factor in some extra funds.
These are the customary charges that are standard across all home equity loans, but it may be useful to put some extra money aside for any unexpected costs that may occur.
HELOC loans are not for everyone, and there can be disadvantages to choosing one. One of the primary principles to understand is your home becomes collateral for your loan. If for any reason you are unable to pay back the HELOC loan that you received, there is a chance that your home could be taken by the lender.
These loans present a potential risk if there is a drop in the amount that your house is worth. For example, if there was a housing market decline and your home decreased in value, you will still be liable for paying back the loan amount in full. Since these loans are based on the amount that your home is worth, any devaluation that occurs can leave you with a loan that is harder to pay back than expected, or you can end up owing more than what your home is worth.
Other important points to consider when applying for a home equity line of credit include:
- Higher closing costs ranging anywhere from 2% to 5% of the total loan amount.
- Variability in your interest rates, which could increase in the future.
- A set period of time during which you must draw out money.
A lengthier and more complicated application period.
Home equity loans and home equity lines of credit are similar, but there are a few key differences between the two. With both types, you will be able to borrow against the equity of your home to utilize the loan amount for other areas of improvement.
A home equity loan is often called a second mortgage and is a debt secured by borrowing against your home. Typically, you will be able to request up to 80% of the equity that you put into your home. Home equity loans come in a lump sum payment with a fixed interest rate and a term of 10 to 15 years, depending on the agreed-upon terms. Usually, the interest rate will be dependent on your credit, as well as a few other factors.
Starting at the beginning of the process when applying for a home equity loan, there are a few prerequisites that you must make sure you meet.
The requirements for a home equity loan usually include:
- Good credit - Before issuing a loan, loan companies generally look for a credit score of 640 or higher. This can be flexible if there are extenuating circumstances, so keep in mind that this is a general rule of thumb and not a hard and fast rule.
- Low debt-to-income ratio - Just like when you’re applying for a mortgage or a conventional home loan, your ratio of debt-to-income should be 41% or less.
- Income rates - For most loans, the amount of income that you have will factor into whether or not you’re awarded the loan, as well as the amount that you receive.
- Consistent payment history - For a home equity loan, a history of reliable payments on your mortgage or other debts is extremely important. It serves as proof that they can rely on you to make steady payments on this loan as well.
- Percentage of equity in your home - Since equity is defined as the difference between what you owe on your house and the market value, this is an important factor for more lenders when considering awarding a home equity loan.
- Current address
- Driver's license and Social Security number
- Two months of bank statements
- Income history for the past two years
- W-2s for the last two years and proof of income for the past 30 days
- List of current debts
Definitely not (unless you want to)! You can do the ENTIRE process online, applying for a Solarity home loan from your home computer or mobile device. In addition, you can call our expert Vancouver, WA Home Loan Guides. If you walk into a branch, we can connect you with our Home Loan Guides that way, too!
We will work around your schedule and will communicate with you in the manner that's most convenient for you. We go to great lengths to make the entire process for you as easy as we can. You can even close the loan from your mobile phone (message and data rates may apply). We can't wait to help you get started!
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