Home equity debt solutions

By Michele Lerner
Mortgage Credit Problems Columnist

A home equity loan, available either as a traditional second mortgage in a lump sum or as a line of credit, allows homeowners to borrow against the value of their property. In order to qualify for a home equity loan, you need to meet several lender qualifications:

  • Sufficient equity. Generally lenders prefer not to lend more than 80 to 90 percent of your home value. For example, if your home is valued at $200,000 and you owe $150,000, you can borrow up to $30,000 at the most.
  • Good credit. While you may intend to use your home equity loan to improve your bad credit and eliminate debt problems, lenders look at your credit score and repayment history to determine how likely you are to repay the loan. If you have bad credit, you may need to work on improving your credit and reducing debt in other ways before you can qualify for a home equity loan.
  • Debt-to-income ratio. Even though you may feel that paying off your debts with a home equity loan will resolve your budget imbalance, lenders use a formula to determine whether your monthly gross income is sufficient to meet your debt obligations.
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The best way to find out if you qualify for a home equity loan is to complete the form on this page and compare offers from various lenders.

Home equity and debt problems

If you do qualify for a home equity loan, understand that you're simply replacing higher interest debt with lower interest debt. It won't really be paid off until you retire the home equity loan. The faster you do that, the faster you solve your debt problems and achieve financial health.

If you can't qualify for a home equity loan, a bad credit or FHA home refinance might allow you to improve your cash flow, and use the extra cash to make larger credit card payments.

No matter how you access your home equity, you must establish a disciplined spending plan to make sure you don't slip into debt again. This is particularly true if you take out a home equity loan, since the consequences of non-payment include foreclosure. Consult a non-profit credit counselor or a financial planner if you think outside help is required to tackle your debt problems.

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