Credit Scores Vital to all US Mortgage Lenders

Are Home Equity Lines of Credit now Dwindling?

May 4, 2009

Homeowners are finding that home equity lines of credit have dried up. US mortgage lenders are only accepting those with the highest credit scores and stable incomes.

US mortgage lenders are applying increasingly stringent lending criteria prior to establishing a relationship with those who wish to borrow money. Whilst personal credit scores have always been important to both lenders and borrowers alike, home equity lines of credit have been vastly reduced for existing homeowners and first-time buyers.

Are Home Equity Lines of Credit Drying-up?

Only homeowners with a stable income, high credit score and 20 per cent home equity are being approved for loans by US mortgage lenders. Banks are heavily concerned by falling property prices and the escalating number of mortgage foreclosures. The net effect is that home equity lines of credit are now very difficult to attain for the majority of existing homeowners and first-time buyers.

US Mortgage Lenders Increase the Cost of Borrowing

According to Bloomberg News, the average home equity line of credit offered by mortgage lenders is currently 5.38%. This is higher than the long term average. However, homeowners that wish to borrow money will find that rates vary considerably between US states. The interest rate in New Jersey is just 4.78% due to lower mortgage foreclosure rates and more stable house prices.

Credit Scores and Debt-to-Income Ratios

Cameron Findlay, the chief economist at Lending Tree, discussed the importance of having a "credit score of at least 720" in a New York Times article in April 2009 called "Why Credit Lines Are Drying Up." Few mortgage lenders will allow a homeowner to borrow money if their debt-to-income ratio is greater than 38 per cent because of the higher associated risk of mortgage foreclosure.

Higher Home Equity and House Deposits Required

The days of 100 per cent mortgages officially ended when the property bubble burst and mortgage foreclosures started to rise. The majority of homeowners and first-time buyers will now require a bare minimum of 20 per cent home equity in order to qualify for most home equity lines of credit. This is to protect lenders in the event of a forced sale due to a loan default.

There is little doubt that home equity lines of credit have been on the decline since mid-2008. Mortgage lenders are belatedly applying more stringent lending criteria for homeowners that wish to borrow money. Until the negative property price trend reverses, only those with good credit scores, 20 per cent home equity and stable employment are likely to be accepted.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Credit Scores Vital to all US Mortgage Lenders in Home Mortgages is owned by Asa Ghaffar. Permission to republish Credit Scores Vital to all US Mortgage Lenders in print or online must be granted by the author in writing.