WHAT IS EQUITY AND WHY IS IT IMPORTANT?


Lenders take equity very seriously. So much so they will require you to have some before issuing a mortgage loan. That is, unless you’re using a VA or USDA loan. Equity is the initial cash pledge from you and is your down payment on the mortgage. The amount of your initial equity is spelled out in your sales contract. Along with the sales price, your agent will also enter the down payment amount from you and a loan amount. Your initial equity will be listed quite prominently on the first page of your contract. Your earnest money deposit will also be listed as well. Your equity is the difference between the current market value of the home and the amount of any existing mortgage(s).

Some loans require more down payment than others. FHA loans ask for at least a 3.5 percent down payment from you as your initial equity. Without that equity position, a lender won’t approve your FHA application. Conventional loans ask for at least 5.0 percent down although there is a conventional program that asks for just 3.0 percent down that assist low to moderate income buyers.

Equity is important because it shows the lender you’re willing to place your hard-earned savings into the transaction in order to receive a loan approval. Equity is also important to a lender both for an approval and also in case a loan goes into default. When a lender forecloses on a property, the lender will sell the home to someone else. If there is initial equity in the property, the lender will have at least gained their money back. Without any equity, the lender cannot recover the funds used to finance the mortgage.

Equity is also important when refinancing a loan. Conventional mortgages ask for at least a 10 percent equity position in order to refinance a home. For instance, if a property is valued at $100,000, then a refinance is possible borrowing up to 90 percent of that amount, or a $90,000 loan. You can also obtain a home equity loan based upon the equity in your home.

You can gain equity as you pay down your mortgage balance. Your equity will also grow if you make extra payments on your mortgage during the term of the loan. You can also gain equity as the value of your property rises. And if you sell in the future, all of that gained equity belongs to you.

For more information or questions about mortgage loans,
Please visit Majestic Home Loan

Or Call  (855) 757-8748

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