by Tom DeLong http://www.ieloanadvice.com
Ontario, CA -- (ReleaseWire) -- 08/07/2007 -- You know, with the recent ups and downs of the real estate market and the number of adjustable rate mortgages resetting to higher mortgage payments, I’m surprised that few, if any, of the many homeowners out there today have actually looked into refinancing their home loans into 125% loan-to-value mortgages. Especially, the ones that now owe more on their home than what their home is currently worth. It’s not like these ‘extended-equity’ loans have shriveled up and disappeared. They’re still out there, albeit, few and far between, but they can be found with a little determination and resourcefulness. And, if you can find one and end up qualifying for it, they really can be a lifesaver.
What exactly is a 125% loan-to-value mortgage?
Simply put, it’s a loan, or combination of loans, that allow you to encumber your home with debt up to 25% higher than what it is actually worth. As an example, if I owned a home worth $300,000, and owed $375,000 on it, I would have a loan-to-value of 125%. The additional $75,000 over the $300,000 value would be equal to an additional 25% in debt that I owed. You can determine on your own how much you can borrow with this loan program by multiplying the current value of your home by 1.25. The resulting figure should equal 125% of your homes value.
Now, these loans aren’t for anybody, so don’t get too excited about the prospect of applying for one. They don’t exist without risks and pitfalls if they aren’t used appropriately, or if you’re just trying to pull money out of your house to finance a spending spree. Plus, the rates on these loans are typically higher than those on other conventional methods of financing so be prepared to pay more than what you’re used to. As I mentioned above, they’re more of a safety net, if you will, for those who are in dire need of a solution to an upcoming or existing financial crisis, and have no other way to curtail or resolve that problem other than borrowing more money against their house.
So, how did these loans come about?
For those of you not aware, these loans first emerged years ago, and were used specifically for homeowners who wanted to finance upgrades or renovations to their home, but did not have the up-front cash to pay contractors for the work that needed to be done. In response to that need, the federal government passed legislation creating a simple, yet effective loan program to resolve this dilemma called the ‘Title I Home Improvement’ loan, which in those days, provided them with up to $25,000 in cash for these repairs. As success with this loan program grew, private lenders began experimenting with variations of their own and eventually arrived at what we have today. The federal government still provides Title I loans, but the restrictions on what that money can be used for has pushed borrowers towards other lending institutions offering more flexible qualifying criteria, as well as higher loan amounts.
Are you required to borrow the entire 125%?
No, not necessarily. You can borrow any amount up to 125%, and it’s actually rare to see someone reach that threshold, unless they do have a serious ongoing debt problem, or they’re in the middle of a home improvement project and need the cash to finance the completion of the work. Most people just borrow enough to see themselves through whatever crisis they’re experiencing at the time.
Am I required to use the funds from this loan for anything specific?
In the ‘old days’ you used to have to use the money for something which increased the overall value of your home. That way, if you ever went into default on the loan, the lender would be able to recoup a portion of what you borrowed through the additional value added by the improvements you made. Nowadays, that specific requirement has been relaxed and lenders are now lending money based on criteria of their own, and the level of risk they’re willing to accept. A majority of the clients I work with are using the extra cash to consolidate debt and to lower their monthly mortgage payments.
What are the interest rates and monthly payments like on these types of loans?
A lot of that depends on the amount of money you borrow versus what your home is worth. The more money you borrow, the greater the risk to the lender and, therefore, the higher the rate and payment. Also, it’s important to consider whether or not you’re going to be refinancing all of the loans held against your house, or just the ones that have the higher interest rates and payments. This will also determine the rate and payment you end up with. Most people I’ve worked with have started with a certain rate, but have opted to buy the rate down far enough to make the monthly payments affordable. Some lenders offer that option to their clients.
What credit score do I need to qualify for a loan like this?
It varies from state to state. Typically, you’ll need a middle credit score of 600 or higher. This means that, of the three credit scores you have on your credit report, the one score that has the middle value is the one the lender looks at when deciding to lend money to you. If that score is equal to or greater than 600, you could be in a good position to proceed. Again, each state is different, so without getting your hopes up too high, I encourage you to speak to a competent, local lending professional to ascertain what credit guidelines you’ll need to follow when applying for a loan like this.
What can I do if my credit score isn’t that high?
There are companies that repair credit professionally, and who are very successful at removing incorrect, outdated, and derogatory information from your payment history safely and legally. Their rates are affordable, and though, you may pay them upfront for the cost of the work, most lenders can usually manage to refund that money back to you at the close of escrow. These companies take anywhere from sixty to ninety days to complete this work, but in rare instances they’ve been known to take longer. It just depends on what needs to be corrected and how much cooperation they receive from both the reporting agencies, and the entity or person reporting the payment history.
Are there any income or documentation guidelines I need to meet?
Of the few lenders I’ve come across, most require you to document the income you’ve received over the previous couple of years. This is known in our profession as a ‘full documentation’ loan, or ‘full doc’, meaning no part of your income can be stated or ‘assumed.’ It must be proven. Secondly, some of these lenders require you to have something called a ‘residual income’ either before or after the loan is done. Residual income refers to the amount of spending money you have left over once all of your bills have been paid. This takes into account only the obligations showing up on your credit report, such as credit cards, personal loans, and home loans. Items such as insurance, utilities and other common expenses are usually not considered.
Do I get to keep my tax deduction?
As I’ve been told, yes and no. I believe that the I.R.S. allows you to deduct mortgage interest which is equivalent to the current market value of your home. For example, if you had a home valued at $100,000, and you owed $100,000, the I.R.S. would allow you to deduct any interest you paid on that loan because your liens would be equal to your home value. When you’re dealing with 125% situations, any interest you pay on the value of your house over the 100% mark is typically not tax deductible. I’m not completely convinced this is true, so I suggest you consult with a competent accountant to verify its accuracy, especially if you’ve made exemption adjustments to your W-4 Withholding agreement in order to compensate for the interest you’re paying on your current home loans.
What types of properties qualify under this loan program?
Again, this varies by lender and state. The majority of lenders will lend over 125% on single family homes, townhouses, and condominiums. Some lenders will allow you to borrow against a second home or investment property, others will not. It all comes down to risk assessment. What does the lender have to lose if you default on your payments, and your home goes into foreclosure? In other words, what tangible assets do you have that they can recoup in the event of non-payment, and how much are those assets worth.
What if I want to sell my home and I still owe more than what my home is worth?
Good question. Without sounding dire, you’re pretty much stuck with the house until the value of your home meets or exceeds what it will sell for on the open market. That’s why you really need to be honest with yourself when deciding to refinance into a situation like this. It’s not something you may be able to get out of right away should the need arise.
I’ve called some lenders and they’ve never heard of this loan program before. What should I do?
It doesn’t surprise me that most of the people in the lending industry either haven’t heard of this type of loan, or cling to the belief that these loans are strictly for home improvement. It just simply isn’t true. If you run into road blocks over this issue, or need help, please visit my website at http://www.ieloanadvice.com, or direct whomever you’re working with there. I’ve prepared free reports and videos for anyone who visits my site, which will explain, in detail, what this loan program is, how it works, and how they can help you qualify for a loan like this. Remember, these loans do not exist without pitfalls, so it’s important to understand what you’re getting yourself into when you apply for one. And, most importantly, whether or not it’s going to improve your situation, or make it worse.
Thanks again, and good luck!
Tom DeLong is National Mortgage Expert who originates loans nationwide via a network of lending institutions. He can be contacted personally through his website at http://www.ieloanadvice.com