Why is it too difficult to get a home equity loan? - IdeaMarketers.com

Scenario:

I have defaulted on my mortgage. My total mortgage debt amount is $90,000. I want to take out a home equity loan to resolve the issue. My friends are telling me that I can use the loan to pay my other bills also, which will be great for me. This way I will be able to get rid of debts sooner. However, I am also hearing that it is quite difficult to get home equity loans. Is it true? My best friend is trying his best to get a home equity loan for past few months. He has not been successful yet. Why is it so hard to qualify for home equity loans? I just can't understand. Thanks for sharing any information.

Solution:

Yes, it is true. A lot of homeowners try to take out home equity loans to pay off their mortgages. However, only few handful people are able to qualify for these loans. Most of the homeowners' applications are rejected by the lenders due to poor credit score, insufficient cash flow, lack of sufficient equity, etc.

It is said that around 27 percent of the American homeowners had negative equity in the last quarter of 2010. The only soothing fact is that the figure has slightly declined in the first quarter of 2011. According to the recent report published by CoreLogic, this figure has dropped down to 22.7 percent.

The top 5 states with highest number of home equities are Nevada, Arizona, Florida, Michigan and California. This implies that the maximum number of homeowners in these states will face problems in qualifying for home equity loans.

Even the people with sufficient equity in their homes may find it difficult to get home equity loans. This is mainly because of the recent changes that have taken place in the mortgage industry. Here are the few changes which have taken place in the mortgage industry lately:

Decline in the number of mortgage lenders, brokers, servicers, etc. who used to deal with home equity loans.

Recent increase in foreclosures and short sales has made the lenders assume that homeowners are not interested in making payments on the loans. This has made the lenders wary of lending including home equity loans.

According to the new government rules and regulations, the lenders need to have high reserves. This has lead to the reduction in all types of lending.

However, this does not mean that you don't have any chance of securing a home equity loan. There are still a number of lenders who give home equity loans. If you have regular source of income, equity in your home, decent credit history, etc. then you can get a loan. It will be much easier for you to obtain a loan if you can pledge collateral against it.

Finally, make sure you have all the important financial documents (paycheck, income tax, etc.) with you before submitting the loan application. This is because the lenders will check all the documents before approving your application.

Jessica Bennet is a contributing financial writer at MortgageFit Community. She has been writing on finance for quite some time. She is an active participant in the forums wherein she helps people with suggestions to their mortgage problems.

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