Back when the real estate market was flying at 30,000 feet, getting a home-equity line of credit was a pretty straightforward process. You called a toll-free number, asked for a loan, and within hours, a guy with a suitcase full of money showed up at your door.
It’s a lot harder now. Some lenders have stopped offering home-equity lines of credit and home-equity loans altogether, even to borrowers with good credit. And lenders that still offer the loans are being a lot more selective.
The lenders that have cut back on home-equity loans and credit lines are mainly those that raise money by selling the loans to investors. Investors have stopped buying such mortgages since the subprime market collapsed, says Bob Walters, chief economist for Quicken Loans, which has stopped offering home-equity loans or lines of credit.
No Investors
Walters says investors have backed away from second mortgages for the same reason they’ve abandoned jumbo mortgages (those that exceed $417,000). Because investment mortgage giants Freddie Mac and Fannie Mae won’t buy jumbos or second mortgages, these loans are considered riskier than so-called conforming loans.
But just as community and national banks are offering jumbo loans, many banks, savings and loans and credit unions are still providing home-equity loans and credit lines, says Keith Gumbinger, vice president for HSH Associates, a publisher of mortgage information.
Those lenders typically use customer deposits to finance loans, so they’re not beholden to Wall Street, he says.
Still, these lenders are unwilling to take big risks with their money, especially in this environment. The Federal Deposit Insurance Corp. said last week that delinquent home-equity lines of credit — those late by 90 days or more — jumped 16.6 percent in the second quarter.
Mortgage broker Pava Leyrer says she’s been able to find home-equity lines of credit for clients with good credit histories who can show they have sufficient income to make payments.
Lending standards “have tightened somewhat to where they should have been in the first place,” she says.
A home-equity line of credit is a revolving credit line, based on the equity in a home, which usually carries a variable rate. A home-equity loan typically provides a lump sum that is repaid over a specified period at a fixed rate.
Interest rates on home-equity loans and credit lines have risen in recent years, but they’re still lower than most credit card rates. In addition, unlike interest paid on a credit card, interest on a home-equity loan or line of credit is usually tax-deductible.
Whether shopping for a home-equity line of credit or a home-equity loan, here’s what to expect:
Higher credit standards. When home values were rising and lenders were fighting for business, homeowners could get loans, even if their finances were a little shaky. Now, “People with lower credit scores are definitely going to have a harder time finding financing than they had in the past,” says Kyle Kilpatrick, executive vice president for LendingTree, a website that helps consumers shop for loans.
Though credit standards vary, borrowers with credit scores of 700 or higher will find the best deals on home-equity loans and lines of credit, Kilpatrick says.
A required appraisal. Back in the heyday of home-equity loans and lines of credit, some lenders didn’t require borrowers to get a traditional home appraisal. Instead, they used a computerized estimate, known as an “automated valuation model,” or AVM, which estimated the value of the home. These computerized appraisals were generally faster and less expensive than hiring a licensed real estate appraiser.
