Easing Home Equity Standards

AS home values continue to stabilize in many areas, lenders are making home equity loans more accessible.

A report published in June by the Office of the Comptroller of the Currency noted that one in five lenders nationwide loosened up underwriting standards on home equity loans, while another 68 percent kept them unchanged from a year ago. In 2009 — during the heart of the housing crisis — no lenders had eased standards, according to the report, which surveyed 87 banks with assets of $3 billion or more, while 78 percent had tightened them.

Lenders also have been lowering the credit scores and equity levels needed to qualify, industry experts say. “You may not need to have as much equity as lenders may have demanded two years ago, when housing prices were going to fall,” said Keith Leggett, a senior economist at the American Bankers Association. This is especially true, he said, in areas where home prices are appreciating.

Nearly 90 percent of homeowners in the New York metropolitan area now have some built-up equity, versus 77 percent nationwide, according to a recent report from the data analytics firm CoreLogic.

Navy Federal Credit Union, with over three million members nationwide and five branches in the New York region, is among those easing qualifications, based on its periodic analysis of borrowers’ lending performance. “We have gone to lower credit scores,” said Steve Krieger, a vice president for mortgage collections and equity lending.

Mr. Krieger says the credit union’s evaluation of home equity applications is based on several criteria, including: the amount of equity available in a home; a borrower’s income; and a loan-to-value ratio. (As little as 5 percent equity may be enough to qualify.) Someone who has been in a job for just two or three months “will be dinged a bit,” he noted.

Lenders calculate the loan-to-value ratio by adding the home equity loan amount to the mortgage balance and then dividing that by the property’s value. Today, 80 to 90 percent would be the highest acceptable ratio, according to Jeanie Melendez, a vice president for market growth and development consulting at Wells Fargo Bank.

Those considering a home equity loan should begin the process by estimating how much equity they might have available in their homes. Mr. Krieger suggested checking recent comparable sales in the neighborhood at online sites like Zillow.com. “You can get into the ballpark of what your home is worth,” he said, though he pointed out that as part of the application process the lender generally requires an official appraisal.

Borrowers must decide whether they want a traditional home equity loan, sometimes called a second mortgage, which has a fixed interest rate and fixed payments, or a home equity line of credit, known by its acronym, Heloc. A line of credit usually has a variable rate and can be drawn down incrementally. The variable-rate Heloc is one and a half percentage points lower than the fixed-rate home equity loan, which in turn is around three percentage points above the average 30-year fixed-rate conventional mortgage.

Borrowers should also note loan restrictions. For example, Navy Federal does not allow home equity loans to be used for small-business investment or to buy a second home, while JPMorgan Chase does not allow them to be used on educational costs. (Some loans are actually audited after closing, to check.)

Wells Fargo, one of the nation’s largest mortgage lenders, has no such restrictions. “I don’t think folks are using it to buy a fur or a big-screen TV,” said Ms. Melendez, who is based in Boston and oversees the New York region. “They’re being more careful about how they’re using their home as an asset.”

Ms. Melendez says that although Wells has not made changes to its lending criteria, it has been seeing increased demand for home equity borrowing, largely to pay for home improvements and college education.

source: nytimes.com