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Emergency Fund

Many people take out a home equity line of credit, which is a form of a home equity loan. This line of credit is like a bank account into your home equity. You have to qualify for the mortgage based on your credit, income, debt ratio, assets and the value of your home. Once the lender approves you and you close on the loan, the lender provides you with access to the funds, which are usually up to 80% or so of the full value of your home. Most lenders provide a checking account with checks or a debit card that you can use to access the funds.

If you take out the line of credit strictly to have an emergency fund, you can let the funds sit there untouched. You do not make any payments on the money unless you withdraw it. If you take money out with a check or the debit card, you then pay interest on those funds. Typically, this lasts for the first ten years of the loan, called the draw period. Once the draw period is over, you no longer have access to the funds and you must then pay the principal plus the interest back to the lender. It is nice to have that emergency fund available should something unexpected come up with your home or even your personal life.

Eliminate Debts

If you have large amounts of debt hanging over your head and you do not like paying multiple creditors every month, you can use the home equity loan to consolidate the debts. In this case, the lender will not give you access to the funds, but rather pay off your other creditors. You decide with the lender how much of your debt you can afford to include in the home equity mortgage. This will play a factor in your ability to obtain approval as well since it affects your debt ratio. Obviously, the more debts you pay off, the lower your debt ratio becomes, but you also have to figure in the new mortgage payment to determine if your debt ratio fits the mold.

If you end up paying off all of your monthly debts, you just make the one payment to your new home equity lender. The remaining debts get paid off at the closing with the proceeds of the loan. If you are financially responsible, you will keep those revolving debts at a zero balance and focus on paying down the home equity mortgage to fully get out of debt.

Make Changes to your Home

Perhaps the most common use for a home equity loan is to make home improvements. This could mean many things – you could make necessary repairs, such as replacing a roof or an HVAC system; you could make cosmetic changes that you desire or make major renovations including room additions. The changes you make obviously depend on the amount of equity you have in the home and how much you qualify to receive. Because repairs and or renovations to a home can greatly increase its value, this is often considered the most valuable use of a home equity mortgage as it gives you a return on your investment.

Pay for College

Student loans are expensive and there is no way around it! If you have equity in your home, though, you can tap into that money to pay the costly tuition and room and board. Sometimes it makes more sense for borrowers to tap into the equity of their home than take out the costly student loans. If your household makes too much money to receive any type of financial support from the government, this is usually the best option. Because you get a tax write-off for a portion of the interest you pay on the home equity loan, it can be beneficial for you to go this route rather than taking out traditional student loans.

Starting a New Business

Starting any type of business can be rather costly, making it difficult to get ahead. A home equity loan can help you gain the capital you need to start the process, though. The good news is that with a business, you usually make the money back faster than you would with any other method. This means that you could get the home equity loan paid off faster than you would if you took the money out for another reason, such as debt consolidation or home improvements. As your business takes off, you can have the capital you need to keep going while still paying your mortgage down or off.

How you use a home equity loan is really a personal choice. Most lenders do not question how you will use it unless there are special circumstances to your loan. If you have a good reason, though, such as consolidating debt, it could help you qualify for the loan, especially if you have a high debt ratio. In general, though, you can take out the home equity mortgage in the form of a line of credit and use the funds as you see fit.

Applying for and being rejected for a home loan isn’t a good feeling, but it doesn’t have to be the end of the road for your potential home-ownership. If you take the right steps, you can try again in the near future.

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Follow these steps if you find yourself in this situation.

Get Information

If a bank or lender turns you down for a loan, they have to give you a reason. If you don’t understand the reason provided, ask for more specifics. If it has anything to do with your credit, they have to send you a letter stating the reasons for the denial. If it was to do with anything besides your credit, most loan officers will happily walk you through the reasons that you were denied.

Once you have the reasons, it’s time to take action. You are armed with information on what is wrong with your application, now you can take the steps to fix those issues.

Fix Your Credit for Your Home Loan Application

Did your loan officer tell you that your credit was the issue? Following are the most common credit issues:

Low credit score – If your credit score is too low, it’s time to pull your credit report and found out why. The letter your lender sends you will explain how you can receive a free copy of your credit report because you were turned down for a home loan due to a credit issue. Get a copy of your report and look for the reason for the low credit score. Was it late payments? Did you charge too much on your credit cards? Do you have too many inquiries?
Not enough credit – If you only have a few trade lines and they aren’t currently active, a lender may not be able to make a lending decision. You’ll need to build your credit up by applying for a few credit cards and using them. Don’t take this as permission to go out and go on a spending spree, though. Instead, charge what you normally purchase and pay cash for, then pay the bill off in full each month. This will establish good spending patterns and help you build up your credit.
Too many inquiries – Inquiries are a red flag for lenders because they could indicate that you have new credit out there that hasn’t reported yet. You may just have to wait it out a few months to prove that you don’t have any new credit lines (if you don’t) or let the new credit lines report on your credit report for the lender to get an accurate credit score and debt ratio calculation.
Negative economic events – If you recently had a bankruptcy or foreclosure, you may not have let enough time pass. Each loan program has a specific waiting period. Ask the lender how long you need to wait. In the meantime, keep improving your credit score to enhance your chances of approval the next time you apply.

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Deal With Low Income

If the lender decided you don’t make enough money, they could turn down your application. While you might think there’s no way to fix this issue, there are a few simple ways.

Take a side gig – Do you have a skill that you could turn into a side job? Whether you offer physical services, such as electrician work, plumbing, or painting or you do something on the internet, such as writing, crafting, or a virtual assistant, there are many ways to make money on the side. You’ll have to have the job for at least 2 years before you can use the income for qualification purposes. If that’s too long, you can use the extra money to pay down your debts and lower your debt ratio to help your chances of approval sooner.
Get a cosigner – If you have a willing cosigner that has good credit, they can help you get approved for a home loan. Make sure it’s someone that is willing to take the obligation of paying the mortgage should you stop paying it. This is a large risk on the cosigner’s part, so make sure there is a clear understanding between both of you.

Deal With Your Debts

Did the lender tell you that you are straddled with too many debts? It’s time to work on them before you apply for another mortgage.

Pay the debts down – It’s time to set up a strict budget to get your debts paid down. If you don’t have extra money lying around, take a second job or side gig to boost your income. Then use that extra money to pay your debts down.
Apply for a lesser loan amount – If it was the housing ratio that was the issue, it might be time to look for a less expensive home. If your credit score was fine and your income is stable, consider a lower sales price, which means a lower monthly payment.

Increase Your Down Payment on the Home Loan

Sometimes it’s just about the amount of collateral you give the lender. If you borrow a large percentage of the sales price, the lender may see it as too high of a risk. Increasing your down payment can minimize that risk. This could take time though, since you’ll have to save money. Using some of the above strategies, such as paying down your debt or taking on extra work can help you save money faster. In some cases, you may even be able to secure gift money for the down payment from family or your employer. Most loan programs allow the use of gift funds to help boost the equity you have in the home and the collateral the bank has to rely on if you default.

Getting turned down for a home loan isn’t fun, but there are ways to overcome it. Use these tips to improve your chances of approval and get the loan that you want to buy your next home.

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How can you Use a Home Equity Loan?