A home equity loan gives you access to the equity you have in your own. Your equity is the difference between your outstanding mortgage balance and the value of your home. If you’ve paid down a good portion of your mortgage balance and/or your home appreciated, you may have a significant amount of equity in your home.
Does it matter what you use the equity for, though? Keep reading to find out the answer.
Lenders Will Ask About the Use of the Funds
Generally, lenders want to know why you want the home equity loan. Does it affect your approval? It may and it may not. It’s generally not a requirement to use the funds in a certain manner, but lenders will keep it in mind as they assess your risk level.
For example, if you have a lower than average credit score and a high debt ratio, lenders will want to know why you need the funds. Are you blowing it on a fancy vacation or are you consolidating your debt to help yourself get ahead? Obviously, if you are using it to help get you out of financial issues, the lender may be more willing to approve your loan than they would if you were using it for a vacation.
On the other hand, if you have great credit and a low debt ratio, the lender may not care as much about what you’ll do with the funds. They may still ask, but it may not affect your loan approval status. This does vary by lender, though.
Good Reasons to Get a Home Equity Loan
As we said above, there isn’t a line drawn in the sand regarding which reasons lenders approve for a home equity loan and which they deny. But, there are a few common reasons that lenders wholeheartedly approve:
- Home improvement – If you want to take money out of your home’s equity to invest it right back into it, you will have a good chance of securing an approval. The lender sees that you are taking the money and investing it right back into the bank’s collateral. If you default, the bank is in good hands because you just improved the home’s value.
- Debt consolidation – If you have a large amount of credit card debt and you’ll pay it off with the home equity loan proceeds, you may have a good chance of approval. Lenders want to know that you are in a good financial position. Be careful, though, if you really are in over your head, a part of the approval may be that you close a few accounts so the temptation to spend doesn’t exist.
Reasons Lenders May Not Approve Your Home Equity Loan
Just like there are reasons that a lender may be willing to give you a home equity loan, there are also reasons that they may not agree to loan you the money. They include:
- Overspending on non-essentials – If you are taking a vacation or buying a recreational vehicle with the money, some lenders may turn the other way. These things aren’t essential and have the potential to put you in a tough financial spot. If you have great credit and a low debt ratio, you may have a chance, but if you don’t, your options may be limited.
- Business purposes – Most lenders aren’t willing to risk their interest in your home for a business. Investing money in any business (even a successful one) is risky. Because it’s your home at risk here, lenders are usually unwilling to put their neck on the line for business funds.
The bottom line is that you usually can use a home equity loan for anything that you want, but within limits. Expect any lender to ask you what you’ll do with the funds. Whether they are doing so on an official level to include in their decision or not is a toss-up. Some lenders use it as a qualifying factor, while others just want to know since they are extending you more money than you currently have out on the home.Click to See the Latest Mortgage Rates»