Jerome and Angela Chandler purchased a 4-bedroom, two-story brown brick Colonial in Detroit’s upscale University District two years ago as the city and the nation were emerging from a recession.
The Chandlers struggled to make ends meet, landing deep in debt after both were laid off from their respective jobs while trying to raise three young children. Still, they were able to scrape together enough savings for a down payment on a $35,000 owner-financed loan to buy the house, Jerome told NewsOne.
Good thing the house was in relatively good condition, because when the family applied for a home equity loan last month to pay off the loan and credit card debt, they only had to make a few home improvements, like painting and patchwork, to meet lender qualifications, Anthony Kellum, president of Kellum Mortgage, a division of Towne Mortgage, which financed the deal for the Chandler, told NewsOne.
The house was recently appraised at $125,000, allowing the couple to take out a loan of $70,000 by refinancing their mortgage, Jerome said. While spending the last couple of years saving and rebuilding their credit, he landed a job working at an IT help desk and his wife, who recently obtained a Master’s degree in accounting, works as an accountant for a major medical provider.
“It’s so amazing how everything worked out,” Chandler said. “After going through all of that, we live in one of the best neighborhoods in Detroit. Everything just lined up in perfect sequence.”
Are you in the market, as well, for a home equity loan or line of credit? Here are 5 things you need to know, according to Kellum:
Check your credit score: Do this first thing out of the gate, Kellum says. “Credit is very important. If it’s low, don’t let that stop you. Just do like the Chandlers and rebuild it.” Use Annualcreditreport.com to learn your score.
Know your loan-to-value ratio: Use a mortgage calculator at financial sites like Bankrate, which will help you determine your ratio (the amount of the loan divided by the appraised value of your home). “A financial institution is not going to lend you money if you owe more than your home is worth, so figure that out immediately,” Kellum says.
Be wise about sprucing up your investment: The Chandlers obtained a Federal Housing Administration loan, also known as a 203K or fixer-upper loan. Since they were coming out of financial hardship and wanted to increase their chances of getting the loan, they made about $1,000 in repairs suggested by the appraiser, interior and exterior painting and light patchwork.
Determine what kind of loan you need: Home equity loans come as fixed rate loans and lines of credit. “Obtaining a fixed rate loan or refinancing your mortgage like the Chandlers may not be as difficult as obtaining a home equity line of credit,” Kellum said.
To obtain a line of credit, also known as (HELOC), you have to be on your job at least 36 months, he said. HELOCs come as variable-rate loans that function much like a credit card and sometimes come with actual credit cards.
Shop around for terms that fit your needs: Home equity loans and lines of credit are both available in terms that range from five to 15 years. Both loans, however, must be repaid in total if the home is sold.
“An important thing to do in this process is to have a plan,” Chandler said. “Plan out exactly what you want to do with the money. We paid off a lot of credit card debt to further help us get back on our feet. And it helps to remember what it’s like to be upside down on mortgage and deep in debt. That hurt so much that today I don’t even like spending money.”