Can Homeowners Still Leverage Their Properties To Gain Credit?

By Author: Martin Sumner
Total Articles: 434
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The last twelve months or so has seen an unprecedented crisis in the world financial system, set in motion by a catastrophic series of loans granted to people so that they could buy a home. These loans were often made to people who had little hope of repaying their debts, and the resulting rise in foreclosures and bad debt has sent shockwaves through the global economy.

We all know by now about the so-called 'credit crunch', where access to credit is tightly restricted for both business and personal customers alike. The pendulum has seemingly swung all the way from finance being available to all, to a complete absence of it to even the most dependable borrowers. It was once the case that owning your home (or being a mortgage payer) was an easy route to gaining credit - is this still the case?

Of course, less credit in the system means that it's harder for anyone to be approved for a loan, and this means homeowners as much as anyone. It's still possible to use the value stored in your home to raise funds, but it all comes down to one thing: equity.

The equity in your home is the difference between how much ...
... money you owe which is secured on your property, and the current market value. In other words, your equity is the amount of money you'd have left if you sold your house and paid of all the debts relating to it. The more equity you have, the easier it is to get credit.

The reason for this is that in these times of falling house prices, if you borrowed right up to the current value of your home today, in a year's time your property might not be worth enough to clear the debt, and the lender could lose out if you fail to keep up your repayments. On the other hand, if you have plenty of equity, even a continued fall in property prices would still leave enough 'headroom' to guarantee that the lender could get back their funds if foreclosure became necessary.

So how much equity is enough these days to make getting a loan fairly easy? Not so long ago, you could borrow 100% or even more of the value of your home. Today, that's all but impossible. In order to secure a loan against your home, most lenders now require that no more than 80% of your home's value has already been lent against, although there are signs that some are raising this figure to 90% in the belief that property prices are stabilizing. It's unlikely that we'll ever return to the days of such easy access to credit and 100%+ lending, but considering the mess we've collectively got ourselves into financially, this is perhaps no bad thing.

About the author: Martin writes for loans site http://www.admloans.co.uk/ who offer loan deals to homeowners and tenants alike, even with bad credit histories.