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Mortgage

Understanding Home Equity: Know How Much Your House Is Worth

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Your home is more than a roof over your head — it can be a source of cash, too. Borrowing from your home equity is a fantastic way to pay for renovations or a down payment for a second property. These loans can even help you consolidate debt or pay for unexpected large expenses. Understanding how much equity you have is a simple equation. Here’s how to calculate that number and transform that equity into helpful cash.

What is home equity?

Home equity is determined by a simple calculation: the current value of your property minus the amount you owe on your mortgage.

“It’s basically the part of your house that you ‘own,” said Tendayi Kapfidze, the chief economist at LendingTree, which owns MagnifyMoney.

As you pay off your mortgage and any other liens against the property, your equity will grow. And if you take out any new loans using your home as collateral, that equity will go down. If the value of your home goes up because the market has improved, your equity will increase as well.

For example, let’s say your home is assessed at $250,000, and you currently owe $100,000. Your home equity would be $150,000. (Although you can’t usually take out that full amount as a loan — more on that later.)

How to estimate how much your home is worth

Don’t just guesstimate your home’s worth — and “guesstimating” applies to online market-price estimates you can find by Googling your property address. These numbers may help you make an initial, very rough guess at your home equity — but making plans with that price in mind may leave you disappointed.

“You can’t know exactly how much your home is worth until you get an appraisal,” Kapfidze said.

Appraisers are experts in evaluating home worth. Not only are they familiar with the local market and comparable properties, but they know exactly how your home’s unique features affect the price. An appraiser will produce a report in which they explain exactly how they calculated your home’s worth and provide corroborating evidence.

You can find an appraiser through the International Society of Appraisers or the National Association of Realtors. But keep in mind: Many lenders request an appraisal during the closing process, and you will likely be responsible for that fee, which typically costs between $300 and $400. Depending on your circumstances, you may want to start the loan process with a lender before hiring your own appraiser.

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How to tap into your home equity

Once you know how much home equity you have, you can start taking advantage of that extra cash. Home equity can be used to renovate your house, afford a down payment for a second home, consolidate debt, pay for school and more.

But “make sure you use the loan product that fits your situation,” Kapfidze said. Some loan types may cost more in interest over time, but provide much-needed flexibility. Evaluate your needs to decide if you need a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance.

Home equity loans

A home equity loan is the simplest way to use your equity. This loan works much like a mortgage: You take out a fixed amount of money, often at a fixed interest rate and repay the loan in regular monthly installments. Fail to repay the loan? Your home is collateral — and the lender can foreclose on the property.

Most lenders will want you to keep at least 15% equity in your home. So, if you have $150,000 in equity for that $250,000 home, your lender will want you to keep $37,500 in equity. The maximum you’ll be able to borrow is $112,500, and that amount may be even less, depending on your finances and credit.

On the surface, the interest rate for home equity loans may seem higher than the rate for comparable HELOCs. But the security of a fixed interest rate — as opposed to a variable rate — is valuable. Getting the money in a lump sum can be helpful if you’re funding a one-time renovation, like a kitchen upgrade.

Home equity lines of credit (HELOCs)

Lenders’ HELOC loan requirements look very similar to those for home equity loans: Borrowers will often need to keep at least 15% equity, and the exact amount issued will depend on finances and credit. But beyond those basic similarities, HELOCs differ quite a lot.

A HELOC works kind of like a credit card: You withdraw from a revolving line of credit, which can be helpful if you’re funding something like a large, sprawling renovation. You’ll make payments against the amount you’ve borrowed, not the entire loan amount. Most HELOCs set out a fixed “draw time” when you can make withdrawals. After that time ends, you can, depending on your lender, either renew your credit line or enter a repayment period.

How that repayment is structured depends on your lender, too. Some require a single balloon payment — which you should plan ahead for, otherwise you risk a big, expensive surprise that could lead to losing your home. Other repayment periods function much like your mortgage, with monthly payments.

But here’s the big HELOC difference: the interest rate. Whereas most home equity loans offer a fixed interest rate, HELOC interest rates are typically variable. Your initial rate may look low, but it could skyrocket as the loan approaches repayment. Pay attention to a few specific terms to ensure that the loan remains affordable:

  • Periodic cap: How much can the interest rate change in one go? This prevents lenders from dramatically increasing the rate, making an inexpensive rate suddenly unaffordable.
  • Lifetime cap: How much can the interest rate change over the life of the loan? This is your loan’s worst-case scenario — so make sure you can afford repayment, even if the interest rate increases as much as possible.

Cash-out refinance

A cash-out refinance is quite different from a home equity loan or a HELOC because you’re “getting a new mortgage on your property,” said Kapfidze. “You’re paying off the old mortgage with the new mortgage.”

Let’s say you still own that $250,000 property and have $150,000 in equity. Many lenders will require you to keep 20% equity in your home — so the most you can refinance is for $200,000. Your new $200,000 mortgage will pay off the old $100,000 mortgage and give you the rest in cash.

Why choose cash-out refinancing over a home equity loan or HELOC? Your new mortgage will be one single payment versus two loans. Depending on your finances, this easier payment may be a blessing. And if you’ve owned your home for a while, interest rates may have dropped dramatically. A cash-out refinance may dramatically lower your mortgage payments.

Home equity and LTV: What to know

To calculate your home’s loan-to-value (LTV) ratio, which is written as a percentage, you’ll need to know your home’s appraised value and current mortgage balance. Divide your loan value — say, $100,000 — by the appraised value of $250,000 and then multiply the result by 100 to determine a LTV of 40%.

If you have multiple loans against your property, lenders will look at your combined LTV, or CLTV. This formula adds all loans together and divides that sum by the appraised value. So if you had an existing $40,000 loan on that $250,000 property, your CLTV would be 56%.

Most lenders don’t let homeowners borrow more than 85% of their home’s value, and cash-out finances are often restricted to 80%.

Borrowing from your home equity can be a great way to access cash at a cheaper rate than private loans or credit cards. And if you use the funds to improve your home or buy a new property, you may be able to deduct interest on your taxes. But beware — home equity loans, HELOCs and cash-out refinancing all require you to put your home up as collateral. If you’re willing to bear that risk, these loans can be useful financial options for homeowners.

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.