Home equity loan standards tighten
As the housing market has cooled, lenders have tightened the standards they use when granting home equity loans and lines of credit.

When the real estate market was booming, getting approved for a home equity loan or line of credit was usually a very simple process. Rising house values gave homeowners a lot of equity to borrow against and many borrowers took advantage of their increased home value. As the housing market has cooled, however, lenders have tightened the standards used when granting home equity loans. They want to be certain that borrowers don’t stretch their equity too far in case home prices fall.

The new lending standards are intended to help protect consumers from getting over their head in debt. While it’s certainly still possible to obtain a home equity loan or line of credit — and with their low rates and tax deductibility they can be a great way to finance a home renovation or other large expenditure — it’s helpful to understand how the standards have changed before applying for a loan.

Here are some of the areas where you may encounter new approval guidelines:

Credit scores
In the new real estate climate, most lenders require better-than-average credit scores before approving home equity loans. If your score is less than 700, obtaining a home equity loan may be more difficult than it was in the past and it may be wise for you to take steps to improve your credit rating before you apply.

Appraisals
Lenders haven’t always required formal property appraisals when they granted home equity loans. Instead, they often relied on an “automated valuation model” (AVM) to estimate the value of a home based on its size and location. In most cases today, however, you will need to obtain a traditional appraisal. (The borrower is generally responsible for the appraiser’s fee — typically between $300 to $600.) If the new appraisal indicates that the value of your property has declined since it was last evaluated, you may end up with less equity to borrow against than you’d anticipated.

Loan-to-value ratios
Many lenders are now less likely to approve loans with large loan-to-value ratios, or LTVs. At the height of the housing market boom, it was sometimes possible to borrow up to 125 percent of the value of your home (less what you owed on your mortgage). Today the limit is typically 80 percent. For example, if the appraised value of your home today is $300,000, 80 percent of that is $240,000. So if you owe $180,000 on your mortgage, you could borrow up to $60,000 of your home’s equity (or $240,000 minus $180,000). This reduction in LTV limit helps to protect borrowers from potentially owing more than their house is worth.

Interest rates
While home equity loans and lines of credit are likely to continue to provide lower interest rates than unsecured loans, some lenders have begun to add a small margin to their rates. This is to compensate for the added risk these loans carry in today’s slower housing market, where it may be more difficult for a lender to sell a home and recoup their investment in the case of a foreclosure.

If you find yourself unable to qualify for a home equity loan, ask the lender what you can do improve your chances of being approved when you reapply. Remember that tighter regulations are designed not to penalize borrowers, but to protect them from taking on more debt than they can comfortably handle.

Rates drop on jumbo loans
By Brenda Spiering – LendingTree.com

After heading upwards between August and September, rates on jumbo loans have started to come back down.

A few months back, if you were searching for a jumbo loan (a loan that exceeds $417,000 — the maximum mortgage size that can be bought by Fannie Mae or Freddie Mac), you’d have had to pay a premium. Due to the turbulence of today’s housing market, many lenders found it more difficult to sell these nonconforming loans to investors. As a result, they either increased the rates on these loans or stopped offering them altogether.

But this month, 30-year jumbo loan rates have started to return to more normal levels. The loans have become available once again at better rates with stricter qualification guidelines designed to reduce loan risk.

If you’re in the market for a jumbo loan, here’s what to expect:

Credit score: You need excellent credit to get the best rates on a jumbo loan today. That generally means a credit score above 720. If your score is between 660 and 720, chances are you can still qualify at a slightly higher rate, especially if you pay points (an up-front fee that’s typically equal to one percent of the loan amount). With a score below 660, your options may be limited.

Full disclosure: Gone are the days when it was fairly easy to obtain a “stated-income” jumbo loan provided you had good credit and sufficient equity. This was particularly helpful for those who were self-employed and who may have earned a good income but wrote much of it off for tax purposes. Most lenders today expect you to be able to document your income even if you’re self-employed.

Down payment: To get a competitive rate on a jumbo loan, you’ll most likely need a down payment of at least 20 percent. Some lenders will grant jumbos at a higher rate with as little as 10 percent down but most lenders have become less willing to take on the added risk of a jumbo mortgage with a high loan-to-value ratio.

By requiring stronger credit and better documentation from borrowers, lenders have taken steps to protect themselves. And borrowers need to protect themselves as well by making sure to obtain full disclosure on the terms of their loan. Never sign anything you don’t understand completely. Obtaining a good mortgage rate is just the beginning — make sure you are also aware of the rules governing your loan agreement so you won’t be hit with any financial surprises down the road.