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How to Qualify for a Home Equity Loan

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a house is an investment, one that can open opportunities in numerous areas of your life. Not only does it become a home for you and your family, you can also borrow money against the property, creating financial flexibility for a wide range of goals.You can access that flexibility is through a home equity loan (HEL) or home equity line of credit (HELOC).

When you take out a home equity loan, you receive a lump sum that you repay at a fixed interest rate.

With a home equity line of credit, you’re approved to borrow a certain amount, but you don’t need to use it all right away.

If you’re approved for $100,000, you might borrow in increments of $15,000 or $20,000, depending on your needs. Unlike HELs, HELOCs typically come with adjustable interest rates, though there are variations in the product terms you’ll want to compare to ensure you’re getting the best deal for your circumstances.

What it takes to qualify for a home equity loan

There are three key factors that impact your chances of being approved for a HEL or HELOC.

Decent credit. The first is your credit score. Because some lenders are more conservative than others, each will have different credit thresholds for approval.

“Getting a home equity is very similar to getting a mortgage,” Kelly Kockos, senior vice president in home equity product management at Wells Fargo, told MagnifyMoney. Borrowers will likely need at least fair to good credit to qualify for a home equity product, she says.

Substantial equity. The second element that needs to be in place is your available equity, which is determined by your existing mortgage balance and the total value of your home. If you’re approved for a loan or line of credit, the lender will decide how much of your equity you can borrow against. Depending how their products are structured, they may allow you to borrow up to 85% of your available equity. Most lenders won’t go above 85%, according to the Federal Trade Commission.

Tendayi Kapfidze, chief economist at LendingTree, says a good rule of thumb is to have a loan-to-value ratio that’s well below 80% before applying for a home equity product (Disclosure: LendingTree is the parent company of MagnifyMoney). He suggests that if a home is worth $100,000, a mortgage balance of $50,000 would be a healthy ratio for taking out a home equity loan or line of credit. Assuming a lender allows you to borrow up to 80% of your home value and that you meet all other criteria, you might be approved for up to $30,000 to use as you see fit.

Kapfidze says the percentage for which you’ll be approved depends on the lender’s criteria and the relationship you have with them. If you hold other assets with them, they may feel comfortable offering a higher loan or line of credit, he says. But regardless of where you apply, equity below 80% will provide enough of a gap between your remaining mortgage and your home’s value to borrow the money you need.

Low debt. Finally, lenders will take your debt-to-income ratio into account. As with other credit decisions, they’ll look at how much you pay each month on your mortgage, student loans, car payments and credit cards, Kockos says. Keeping these as low as possible will boost your chances of approval because a high debt-to-income ratio may raise red flags about your ability to manage another significant payment.

“If your debt is over 43% of your income, then it’s probably not a good thing for you to take on more debt,” Kockos said.

The benefits of home equity loans and lines of credit

Both HELs and HELOCs provide access to funds and offer a means to cover important expenses.

Kapfidze says that because home equity products are backed by your house as collateral, you’ll often secure better interest rates than you would through a personal loan or credit card. That’s why some consumers will use home equity to purchase cars or pay off student loans, because they’re able to secure better interest rates that way.

Whether you choose a home equity loan or line of credit depends on your particular circumstances.

Depending on how you use your loan, you may qualify for a tax deduction. You may choose to limit your home equity spending based on new tax limitations as well. The Tax Cuts and Jobs Act stipulates that you can only deduct interest paid on a home equity loan or line of credit if you use the funds to renovate, build or purchase the house that secures the loan, according to the IRS.

Who home equity loans are best for: Kockos says that home equity loans make sense for consumers who know they need a set amount of cash right away. If you’re facing a major expense with a set dollar amount — a medical procedure or a roof replacement, for instance — you may want to take out a loan for the exact amount you want to borrow. You can then lock it in at a fixed interest rate and you’ll know what your monthly payments will be for the duration of the loan.

Who HELOCs are best for: A home equity line of credit may make more sense if you want access to a certain amount of money but don’t necessarily want to use it all immediately. Unlike with an HEL, you’ll only pay on what you’ve already drawn from a HELOC. Kockos offers the example of using a HELOC to cover home remodeling expenses. You might be approved for $100,000 but you may not pay all of your contractors at once. Instead, you might pay $25,000 to one vendor this month and $10,000 to another next month. If that’s the case, you’d use your credit line as each expense comes up, and you only pay interest on the funds you’ve already drawn.

David Gorman, a division executive at Bank of America, says a home equity line of credit has become increasingly popular among both lenders and borrowers. “You very rarely see home equity loans anymore,” he said.

He attributes this shift to the flexibility of HELOCs. Even consumers who want to lock in a fixed rate can do so on their lines of credit, he explains. If you spend $30,000 of an $80,000 line of credit on roof repairs, you can lock in that $30,000 at a fixed rate to avoid significant interest increases during repayment. This provides some of the security of a home equity loan without sacrificing the benefits of the HELOC.

“It acts almost the same, and they don’t have to take it all out upfront,” Gorman said. “It provides you significant flexibility.”

The risks of home equity loans

The number one risk you must be aware of when you apply for a home equity product is that you’re borrowing against your home, and your lender can foreclose on it if you don’t make your payments.

“You’re risking your house, whereas with other types of loans, you may pay a higher interest rate but you’re not putting your house ‘on the line,’” Kapfidze said. Consumers should be well aware of that risk when applying for a home equity product, he added, but if they go into it with a full understanding of the terms, they’ll find that they are likely to get the best rates through these options.

Knowing that your house is at stake makes it vitally important to think carefully about how you spend your home equity funds. You can use the money however you choose, whether that’s to repair your basement after a flood or take a second honeymoon. However, paying for nonessential renovations or family vacations leaves you with less money to cover emergencies, not to mention with potentially significant debt that could become difficult to repay. Gorman says that Bank of America doesn’t advise borrowers on how to spend their money, but he says that misuse of funds is one of the biggest pitfalls that ensnare consumers.

“Should they actually need the equity in their house for other things down the road, they may no longer have it,” he said.

Shopping for a home equity loan

Look beyond the interest rate. The obvious comparison point when comparing HEL and HELOC offers is the interest rate. However, there are several other factors to consider as well. One is the fee — how much is the lender charging on top of your monthly interest payment? Another is whether there are rate caps in place to protect you against future interest rate spikes. Kockos recommends looking at annual and lifetime rate caps to determine which offers provide the best protection features throughout the life of the loan.

Compare flexibility. Kockos also suggests comparing product flexibility among HELOCs. Some lenders will offer lock and unlock features for their home equity lines of credit. This allows you to secure a portion of your spending at current interest rates but unlock it later if rates drop and you want to secure those instead. If your lender offers a lock and unlock option, be sure to ask how many times a year you’re allowed to use that feature so you’ll know how agile you can be based on rate volatility. Kockos notes that some lenders will offer promotions or discounts on fixed-rate home equity loans, so it’s worth inquiring about those as well.

Consider closing costs. Jorge Davila, vice president of sales, consumer direct and digital mortgage lending at Flagstar Bank, says it’s important to compare post-closing services as well. He recommends comparing when and how you’ll be able to access funds, whether there are mobile management options and whether there are prepayment penalties for your loan or line of credit. Factoring in servicing features along with rates and protections will give you a full picture of what you can expect from working with a lender.

What to do if you don’t qualify for home equity products

From a lender’s perspective, issuing a home equity loan or line of credit is riskier than giving someone a mortgage. Kapfidze explains that the mortgage lender has the first lien, meaning that they’ll be repaid first if you default on your loans. Because the home equity lender has the second lien and therefore carries more risk, their approval thresholds are likely higher. This means that your chances of qualifying for a home equity product may be lower.

However, if you still need access to a large sum of money, you may qualify for a cash-out refinance. In this case, you would refinance your current mortgage for a higher dollar amount that includes the remaining balance on the loan plus additional funds you can use for renovations and other needs. The difference between the two is what’s available for spending. Kapfidze notes that consumers can see higher interest rates on their refinanced mortgages than on their existing mortgages, so it’s important to be aware of the additional costs you’ll incur before pursuing this option.

Making the right home equity decision

The first step in applying for a home equity loan or line of credit is meeting with lenders. They can explain the qualification process so you’ll know exactly what to expect. But you’ll also want to dig into the specifics of their offers and get a sense of what it will be like to work with them. As with a mortgage, you may be repaying this loan over decades, so you want to make sure their terms and support options work for your needs. The right lender can help you determine how much to borrow and how to maximize the opportunities associated with home equity borrowing.

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.

Casey Hynes
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Casey Hynes is a writer at MagnifyMoney. You can email Casey here

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Guide to Getting a Federal Housing Administration (FHA) Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Couple Celebrating Moving Into New Home With Champagne

Not all homebuyers have the money to make a traditional 20% down payment. The perception that you need one is one of the main financial obstacles that can discourage people from pursuing homeownership.

In reality, there are several options for buyers who want to get a mortgage but can only pull together a small down payment. One of the best ones, particularly for first-time homebuyers, is an FHA loan.

This article offers you a guide to getting an FHA mortgage, including details on how to qualify and the costs to consider.

Understanding the FHA mortgage program

FHA mortgages are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. The program is a key way that people of moderate income can become homeowners. Nearly 83% of homeowners who borrowed an FHA loan in 2018 were first-time homebuyers, according to a report from HUD.

FHA mortgages are funded by FHA-approved lenders and then insured by the government. This backing protects lenders from loss if borrowers default. Because of this protection, lenders can be more lenient with their qualifying criteria and can accept a significantly lower down payment.

You can get approved for an FHA mortgage with as little as a 3.5% down payment and a credit score of 580. You may also qualify with a credit score as low as 500, though you’ll need to put down 10% instead.

On a $200,000 home, that comes out to a down payment of $7,000 to $20,000 when taking out an FHA loan, depending on your credit score.

Keep in mind you’ll also be responsible for closing costs, which typically cost 2% to 5% of a home’s purchase price. Closing costs are necessary to complete your transaction, and include services such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

Is an FHA loan right for you?

FHA loans are particularly suited for several different types of homebuyers.

First-time homebuyers, who often have lower credit scores and smaller available down payments, tend to gravitate to FHA loans. Additionally, boomerang buyers — people who lost a home in the past due to a bankruptcy, foreclosure or short sale — might also benefit from an FHA loan.

Negative credit events such as foreclosure can drop credit scores by more than 100 points in many cases, and there’s typically a waiting period of three years before you’re eligible to buy a home again. Once that’s up, the lower credit score requirements of the FHA loan program could help you become a homeowner again.

Types of FHA mortgages

The FHA offers both 15- and 30-year mortgages, each with fixed rates or adjustable rates.

With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. You know what your principal and interest payment will be for the life of the mortgage. However, your overall monthly payment may increase or decrease slightly based on your homeowners insurance, mortgage insurance premium and property taxes.

Adjustable-rate FHA mortgages start out with a low and fixed interest rate during an introductory period of time, usually five years. Once the introductory period ends, the interest rate will adjust annually, which means your monthly mortgage payments may increase based on market conditions.

A unique situation where signing up for a low, adjustable-rate FHA mortgage could make sense is if you plan to sell or refinance the home before the introductory period ends and the interest rate changes. Otherwise, a fixed-rate FHA mortgage has predictable principal and interest payments and may be the better option.

FHA loan limits

The FHA imposes a limit on the amount of money that homebuyers are allowed to borrow each year. For 2019, the FHA loan limits for one-unit properties are $314,827 in most U.S. counties and $726,525 for high-cost areas. You can find your county’s loan limit information for one- to four-unit properties by using the FHA’s lookup tool.

Qualifying for an FHA loan

Besides the low down payment, an undeniable benefit of the FHA mortgage is the low credit score requirement. You may qualify for a 3.5% down payment with a credit score of 580 or higher. You can qualify with a minimum credit score of 500, but you’ll have to make at least a 10% down payment.

Your debt-to-income (DTI) ratio is another key metric lenders use when determining whether you can afford a mortgage. DTI measures the percentage of your gross monthly income that is used to repay debt. Lenders consider two DTI ratios when determining your eligibility — the front-end (housing debt) ratio and the back-end (total debt) ratio.

Your front-end ratio is the percentage of your income it would take to cover your total monthly mortgage payment. Lenders typically like to see a front-end ratio of no more than 31%.

Your back-end ratio illustrates the percentage of your income that covers your total monthly debts. Lenders prefer a back-end ratio of 43% or less, but may approve a higher ratio if you have compensating factors, such as a higher credit score or a larger down payment.

You’ll also need to have a steady income and proof of employment for the last two years. Additionally, the home you’re purchasing via FHA must also be your primary residence, at least for the first year.

FHA mortgage insurance

At first glance, an FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you must pay mortgage insurance premiums (MIP) in exchange for your lower down payment.

Remember, FHA-approved lenders offer mortgages that require less money down and flexible qualifying criteria because the Federal Housing Administration will cover the loss if you default on the loan. The government doesn’t do this for free.

FHA mortgage borrowers must “put money in the pot” to cover the cost of this backing through upfront and annual mortgage insurance premiums. The upfront insurance premium costs 1.75% of the loan amount and can be rolled into your mortgage balance.

The annual mortgage insurance premium is divided into 12 installments and paid monthly as part of your mortgage payment. The annual premium ranges from 0.45% to 1.05%, based on your loan term, loan amount and loan-to-value ratio (LTV).

Your LTV is a metric that compares your loan amount to your home’s value. It also represents the equity you have in the property. For example, putting 3.5% down means your LTV would be 96.5%. In other words, you have 3.5% equity in the home, and your loan is covering the remaining 96.5% of the home value.

Here’s the annual MIP on a 30-year FHA mortgage (for loans less than or equal to $625,500):

  • LTV over 95% (you initially have less than 5% equity in the home) – 0.85%
  • LTV under 95% (you initially have more than 5% equity in the home) – 0.8%

As you can see, starting off with a smaller down payment will cost you more in mortgage insurance premiums. Additionally, in most cases, you’ll pay annual MIP for the life of your loan.

However, if your LTV was less than or equal to 90% at time of origination — meaning you made a down payment of at least 10% — you can cancel MIP after 11 years.

FHA loans vs. conventional loans

Government-backed home mortgages like the FHA loan are special programs serving borrowers who might not qualify for a traditional mortgage.

Conventional mortgages are offered by lenders and banks and typically follow Fannie Mae and Freddie Mac’s mortgage standards. Fannie and Freddie are government-sponsored enterprises that buy loans from mortgage lenders and banks that fit their requirements.

The qualifying criteria bar for conforming loans is usually set higher. For instance, you typically need to have at least a 620 credit score to qualify for a fixed-rate conventional loan. However, credit score minimums vary by lender, but in any case, a score above 620 will be necessary for the most competitive interest rates.

A misconception about conventional mortgages is that borrowers must have 20% for a down payment to qualify. Mortgage lenders may accept less than 20% down for a conventional mortgage if you have a high credit score and pay their version of mortgage insurance premiums, which is called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, PMI is a private insurance policy that protects the lender if you default. Be careful not to confuse the two types of insurance policies.

If you have PMI on a conventional mortgage, you’re able to request the removal of those insurance payments when you build up 20% equity in your home. On the other hand, the mortgage insurance premiums for most new FHA mortgages can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Choosing an FHA loan can be a shortcut to homeownership if you don’t have much cash saved or the credit history to get approved for a conventional mortgage. Still, the convenience comes at a price that can follow you for the entire loan term.

Furthermore, putting a small sum down on a home means it will take you quite some time to build up equity. A small down payment can also increase your monthly payments and interest rate.

Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking an FHA mortgage is the only answer to a limited down payment.

If you plan to put down at least 5% toward your home purchase and have a good or excellent credit score, it might make sense to borrow a conventional mortgage instead. A conventional home loan with PMI may not require the same upfront insurance payment as the FHA home loan, so you can find some savings there. Plus, you’re capable of getting rid of PMI without refinancing.

There are a few conventional mortgage programs that allow a 3% down payment, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program. These products also have cancellable mortgage insurance.

Shopping for an FHA loan

So, you’ve reviewed all the information and determined that an FHA loan is right for you. Once you’re ready to start the homebuying process, one of the most important things on your to-do list is shopping around.

Gather quotes from multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with the approved lenders in your area, you can use the HUD’s lender list search to locate them.

Comparison shopping for the best mortgage rate can save you thousands in interest over the life of your loan, according to research from LendingTree, which owns MagnifyMoney. Be sure you also compare the various other costs associated with borrowing a mortgage, including lender fees and title-related expenses.

Don’t rush to a decision. If you’re still not sure which mortgage type will be the most cost-effective for you, ask each lender you shop with to break down the costs for a comparison.

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.

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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2019 FHA Loan Limits in Wyoming

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re looking to buy a house in Wyoming, you probably already know the state boasts the nation’s smallest population and the lowest population density. Its rural nature makes Wyoming the perfect place for homeowners who want to enjoy the natural wonders of the West without living right on top of their neighbors.Wyoming is also a state where homeownership is a reality for a large portion of the population: The U.S. Census Bureau estimates that more than 69% of the homes in the state are occupied by their owners.

So how do you make your Wyoming homeownership dreams come true? One popular option is a loan backed by the Federal Housing Administration (FHA). Last year, 0.23% of the nation’s FHA loans originated in Wyoming, where buyers took advantage of the federal backing to access benefits like lower interest rates and smaller down payments.

But keep in mind that FHA loans are subject to limits on the amount you can borrow. Those limits change every year to keep up with housing prices across the country. This year, FHA loan limits have climbed in Wyoming, allowing potential buyers who qualify for an FHA loan to borrow up to $314,827 for a single-family home.

Wyoming FHA Loan Limits by County

County NameOne-FamilyTwo-FamilyThree-FamilyFour-FamilyMedian Sale Price
ALBANY$314,827$403,125$487,250$605,525$239,000
BIG HORN$314,827$403,125$487,250$605,525$139,000
CAMPBELL$314,827$403,125$487,250$605,525$228,000
CARBON$314,827$403,125$487,250$605,525$174,000
CONVERSE$314,827$403,125$487,250$605,525$207,000
CROOK$314,827$403,125$487,250$605,525$199,000
FREMONT$314,827$403,125$487,250$605,525$77,000
GOSHEN$314,827$403,125$487,250$605,525$159,000
HOT SPRINGS$314,827$403,125$487,250$605,525$157,000
JOHNSON$314,827$403,125$487,250$605,525$225,000
LARAMIE$314,827$403,125$487,250$605,525$243,000
LINCOLN$314,827$403,125$487,250$605,525$253,000
NATRONA$314,827$403,125$487,250$605,525$215,000
NIOBRARA$314,827$403,125$487,250$605,525$165,000
PARK$314,827$403,125$487,250$605,525$241,000
PLATTE$314,827$403,125$487,250$605,525$175,000
SHERIDAN$314,827$403,125$487,250$605,525$253,000
SUBLETTE$314,827$403,125$487,250$605,525$235,000
SWEETWATER$316,250$404,850$489,350$608,150$259,000
TETON$726,525$930,300$1,124,475$1,397,400$789,000
UINTA$314,827$403,125$487,250$605,525$206,000
WASHAKIE$314,827$403,125$487,250$605,525$173,000
WESTON$314,827$403,125$487,250$605,525$184,000

How are FHA loan limits calculated?

FHA loans are backed by the federal government, and it sets the loan limits.

The government sets a floor limit, which is the maximum amount that buyers are allowed to borrow in areas deemed “low cost.” It also sets a ceiling limit, the maximum amount an eligible buyer can access in an area that’s considered “high-cost.”

The FHA bases its figures on the conforming loan limit — the biggest loan that Fannie Mae and Freddie Mac will buy — with the floor set at 65% of the conforming loan limit, and the ceiling at 150%.

All 23 counties in Wyoming are considered low-cost, and therefore have the loan limit of $314,827.

These are the limits that the FHA has set for low-cost areas across the United States this year:

  • One-unit: $314,827
  • Two-unit: $403,125
  • Three-unit: $487,250
  • Four-unit: $605,525

These are the limits set for high-cost areas across the USA in 2019:

  • One-unit: $726,525
  • Two-unit: $930,300
  • Three-unit: $1,124,475
  • Four-unit: $1,397,400

Are you eligible for an FHA loan in Wyoming?

Of course, just buying a house in Wyoming won’t guarantee you a $314,827 mortgage, nor does it grant you access to an FHA loan. There are requirements to meet regarding your credit score, debt-to-income ratio and other factors. You can find out more in MagnifyMoney’s complete guide to FHA loans.

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.

Jeanne Sager
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Jeanne Sager is a writer at MagnifyMoney. You can email Jeanne here

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