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Mortgage

A Guide to Home Equity Loans

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Homeowners who need to take out large loans should look no further than their own properties. Home equity loans, often referred to as second mortgages, are a realistic solution to finding the funds, as your home’s equity will be used as collateral when you borrow money. According to an October 2018 Mortgage Monitor Report by Black Knight Inc., Americans have an estimated $5.9 trillion in tappable equity from mortgage properties at their disposal.

Here’s a closer look at what these loans are, how they work and how they’re being affected by the current housing environment. Despite rising interest rates and new tax law reforms, they’re still a relatively safe way for you and your family to get the money you need.

How does a home equity loan work?

Interest rates

Just like the majority of mortgages on the market today, home equity loans usually have a fixed interest rate, which means you’ll pay the same amount in interest over the life of the loan. However, these rates tend to be higher than you would find with a traditional mortgage.

“Interest rates tend to be higher because the loan is in second position,” said Robert E. Tait, a senior loan officer with Allied Mortgage Group in Pennsylvania. “The bank is assuming a greater amount of risk because you’re more likely to pay your initial mortgage first if something happens to your income.”

As of the time this was written, the rates advertised through the LendingTree platform ranged from 4.25% to 6%, depending on how much is borrowed. LendingTree is the parent company of MagnifyMoney.

Terms

Home equity loans operate similarly to traditional mortgages where the loan term is concerned. They are paid on a fixed amortization schedule, or loan term, that’s usually 10, 15, 20 or 30 years in length.

Similarly, when you make a payment each month, you’re paying down a portion of both the principal and the interest. In this case, it’s important to continue making your payments because your home is collateral. If you stop paying, the lender can foreclose on your home.

Fees

“These days, most home equity loans are really inexpensive,” Tait said. “The lender is paying a very small processing fee, people are moving toward electronic appraisals and most of the time, there’s no need for title insurance.”

However, Tait cautioned that although an electronic appraisal is cheaper, the value of the home may come in lower. If that happens, you can always elect to have a traditional appraisal done, but you’d have to pay for it.

In addition to the upfront costs, there are also taxes to think about. In the past, homeowners were able to deduct the interest paid on home equity loans, regardless of where the money was spent. These days, though, the process is a little different. Since the passage of the 2017 tax reform law, interest from a home equity loan can only be deducted if the funds are used to buy, build or substantially improve the home that secures the loan.

Why would you take out a home equity loan?

Because home equity loans are paid out in one lump sum, they can be an appealing solution to a variety of high-cost situations, such as making home improvements, paying off medical debt or financing your child’s education.

However, even though these loans tap into the equity in your home in exchange for payment, they have the benefit of remaining separate from your mortgage. This allows you to keep the mortgage’s current terms, as well as the progress you’ve made in paying it off.

“Interest rates five or 10 years ago were lower than they are today,“ Tait said.

“A lot of the time, you’ll see people who have been in their homes for a while at those low interest rates, but they’ll want to tap the equity in their home to help pay for college. A home equity loan lets them still keep those low rates while getting the money that they need.”

As for whether that benefit has changed in the face of today’s rising interest rates, experts believe there’s still benefit to be had.

“Interest rates are less of a slam dunk than they were a few years ago,” said Kevin Leibowitz, CEO and mortgage broker at Grayton Mortgage Inc. in New York. “But they’re still fairly low from a historical prospective. You’re still paying less than you would for a personal loan of the same value.”

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Qualifications for getting a home equity loan

For the most part, qualifying for a home equity loan is a lot like applying for your first mortgage. Just as if you were seeking a traditional mortgage, the lending company will look at a variety of factors, including your employment information and your credit score.

“As a rule of thumb, you need to have two years of W-2s that show stable or increasing income, a credit score of at least 620 and a debt-to-income ratio of 43% or less,” Leibowitz said.

However, for home equity loans, there’s one additional factor that has to be evaluated. Lenders also look at the amount of equity that you have in your home because it helps them decide the amount they’ll let you borrow.

For reference, your home equity can be calculated by taking the appraised value of your home and subtracting the balance on your current mortgages.

Before you start thinking about how much money you have at your disposal, however, know that lenders don’t let you borrow against the full amount of equity you have in your home. The amount you can borrow is typically limited to 85% of your equity.

Additional costs of home equity loans

Though home equity loans may be getting less expensive, keep in mind that the exact fees that you’ll be charged will vary by lender. Some may waive fees as part of their offerings, while others will not.

In general, you should be prepared to pay between 2% to 5% of the loan’s value in closing costs. Below is an explanation of what these costs cover.

Application fee

Some lenders may charge a fee for the initial tasks required to approve your loan, such as running a credit check. These fees, ranging from $25 to $150, may be used simply to ensure that the borrower doesn’t go away.

Home appraisal

As mentioned earlier, in order to find out how much equity you have in your home, the lender must first find out your home’s fair market value. This is done by ordering an appraisal, which can cost between $300 to $400. Sometimes, automated or “drive-by” versions are used, rather than the traditional in-person method.

Document preparation

Some lenders charge a fee to prepare all the documents related to closing. Usually, a lawyer or other financial specialist will complete this task.

Title search

A title search is used to discover the rightful owner of the property so that when you take possession, you can rest assured that you own the property outright. It’ll cost around $75 to $100.

Tips on finding the best loan for you

“Your first call should be to whoever holds your first mortgage to see if there’s a program available to you,” Leibowitz said. “The approval process will likely be easier, and you may get better terms than you would see with some of the larger lending institutions.”

However, regardless of where you do your shopping, do your own research, including gaining an understanding of all loan documents.

“Research the terms of the loan in full — not just the interest rates — before you sign anything, Tait advised. “A lot of times, I see people who are obsessed with getting the lowest interest rate and cheapest fees.”

“I like to say an eighth of a point won’t change your lifestyle, but what could is accidently getting into the wrong product. Make sure you understand exactly what you’re agreeing to before signing on the dotted line.”

Finally, be sure to look into the lender, as well.

“Bottom line,” Tait said, “engage with a person who you trust, who’s been referred to you. Do your research. Talk to them. Get comfortable with who you’re going to use.”

Is a home equity loan right for you?

Taking out a home equity loan is a big decision, but if you’ve cared for your home and worked hard to pay it off, the equity you’ve built may just be one of your most valuable assets. In addition, this type of loan’s fixed interest rate and repayment schedule make it an attractive choice for those who need a lump-sum payment to take care of expenses.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

How to Recover From Missed Mortgage Payments

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.