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Mortgage

Steps for Getting the Best Home Equity Loan Rate

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Buying a home is a major investment, but homeownership has its privileges. With home values having risen more than 7% in the last year, according to real estate marketplace Zillow, many homeowners are finding themselves with a growing amount of equity at their disposal.The average homeowner with at least 20% equity had $136,000 in equity at the end of September 2018, according to data analytics and solutions provider Black Knight. That’s good news if you want to borrow against your equity to make home improvements, pay off debts, finance a child’s education or fund other pressing financial needs.

However, interest rates have been rising. If they continue to do so, the costs of borrowing against your equity may increase in the coming months. As a result, some homeowners may feel like the time to tap their equity is now.

There are three basic ways to access the equity in your house: You can take out a home equity loan, open a home equity line of credit, or HELOC, or initiate a cash-out refinance. Here’s how to figure out which is right for you and how to make sure you get the best rate.

Current home equity loan rates: What to expect

If you’re thinking about taking out a home equity loan, it’s a good idea to do some research about the current landscape. At the end of 2018, the average home equity loan rates were about 5.52% and the average HELOCs were approximately 6.05%, according to Black Knight’s loan-level mortgage performance database.

Credit and equity requirements

Lenders consider a number of factors when determining whether you can borrow against your equity and what rate you may be eligible for. Among them:

    • Your income. Lenders want to see whether you have enough money to pay back the loan.
    • Your credit score. The higher your score, the better the rate you’ll likely get. Different lenders have different requirements. For example, Discover requires a minimum credit score of 620.
    • Your debt-to-income ratio. Lenders want to see how much money you spend in debt payments compared to the amount of income you make. Many lenders want to make sure you’re not spending more than 43% of your pre-tax income on debt.
    • The amount of equity in your home. A lender won’t let you borrow all of your equity. Rather, they’ll calculate what’s known as your combined loan-to-value (CLTV) ratio to determine how much you can borrow.

To come up with your CLTV ratio, add the amount you currently owe on your mortgage to the amount you want to borrow and then divide that by the total value of the house. For example, if you owe $80,000 on your home and you want to borrow $20,000 and the house is worth $150,000, your CLTV ratio would be $100,000 divided by $150,000, or approximately 66%.

Many lenders, such as Wells Fargo and Bank of America, will let you borrow up to 85% of your CLTV, though some may let you borrow more. For example, Discover will in some cases let you borrow up to 95% CLTV.

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Risks and rewards of home equity loans and HELOCs

Borrowing against the equity in your house is not a decision to take lightly. There are pros and cons. Among the reasons you might want to tap your equity:

You may get lower interest rates. You may find that you get a better interest rate taking out a home equity loan than you would if you borrowed money in other ways, such as by taking out a personal loan or turning to credit cards.

You may get a (limited) tax break. Until recently, one of the biggest benefits of home equity loans and HELOCs was that interest was deductible, unlike with other types of loans.

However, the Tax Cuts and Jobs Act of 2017, which went into effect last year, limited the tax benefits somewhat. Today, interest from home equity loans and HELOCs is only deductible if the loans are used for home improvements, according to the IRS. If you’ve been thinking about renovating the kitchen or adding another room, a home equity loan could make sense.

However, it’s also important to recognize that home equity loans come with some risk.

You could lose your house. When you borrow against your equity, you’re essentially putting your house at risk. If you have trouble making payments on your home equity loan or HELOC, your house could be foreclosed upon.

There are costs associated with the loan. Not only will you have to pay interest on the money you borrow, but you may be charged upfront fees or closing costs.

You may just be moving around debt. Be particularly cautious if you’re thinking about using your equity to pay off other debt such as high-interest credit cards. While you may get a lower rate by taking out a home equity loan, you’re basically replacing one debt for another.

Choosing the right type of loan

Once you decide that you want to borrow from your equity, “the most important thing is shopping, comparing and looking at the different options,” said Andy Harris, president of Vantage Mortgage Group, based in Lake Oswego, Ore. Here’s how the three options compare.

Home equity loan. A home equity loan is a lump sum loan that you make payments on for the life of the term. You’ll typically pay a fixed rate, which means it won’t change for the life of the loan. You may also have to pay certain fees when you take out the loan.

Home equity loans may be best for you if you need a set amount for a one-time specific financial goal, such as a major home improvement or a medical crisis.

Home equity line of credit. A HELOC is a line of credit that you can borrow from as you need, making payments only on what you borrow. You can take out money and make minimum payments on the interest only during what’s known as the “draw period.”

Once that period ends, you’ll no longer be able to withdraw money and your minimum payments may become larger or the entire balance may become due. It’s also important to know that HELOCs typically have adjustable interest rates, meaning the rate you pay can fluctuate over time and your payments may vary from month to month.

A HELOC may be best if you want to borrow money that you think you can pay back quickly, Harris said. It’s also more flexible than a home equity loan, since you’re only borrowing money as you need rather than being stuck paying back an entire lump sum. Since you only pay interest on the amount you actually use, a HELOC might be ideal if you simply need extra cash to tide you over for a set period of time.

Cash-out refinance. Another way to access your equity is a cash-out refinance. This is when you take out a new mortgage loan that’s larger than your current one. As a result, you end up with enough to pay off the existing mortgage and borrow some of your equity from the home in the process. For example, if you owe $120,000 on your house and your house is worth $270,000, you might refinance to a $160,000 mortgage and borrow $40,000 in cash.

A cash-out refinance may be best if you can get an interest rate on the new mortgage that’s lower than the rate you currently have on your first mortgage. To determine whether a cash-out refinance makes more sense than taking out a home equity loan, consider the terms of the deal and the total amount of payments and interest over the life of the loan, Harris said.

If you refinance to another 30-year mortgage, keep in mind that you’ll be extending the amount of time it takes to pay off your mortgage and you may be paying more in interest over the life of the loan. You’ll also have less equity in your home if you take the cash out, so if you plan to sell your house soon, you may not get as much for it.

Conclusion

If your home has built up a significant amount of equity, you may be able to leverage that equity to meet other financial goals. However, take the time to shop around to make sure you choose the option that will not only help you financially today, but that will benefit you years down the road.

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.

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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.