Navigating Home Equity Loans After a Natural Disaster
Knowing how to rebuild and restore your life can be difficult when a natural disaster strikes. Your home and property may have been severely damaged, resulting in homelessness and financial strain.
Insurance may help with rebuilding, replacing possessions, and additional living expenses, but only if you have the appropriate disaster coverage. And even with the help of insurance payouts, they may impose dollar or time constraints on what they will pay for.
If you’re experiencing financial strain during this tumultuous time, consider home equity loans that offers lower interest rates than other lending sources. A home equity loan will provide money when needed and fill the funding gaps that slow your rebuilding efforts. Learn how to obtain a home equity loan when a natural disaster occurs.
The Application Process
You’ll need to supply various financial documents with your application so the lender can assess your financial situation and confirm your income. You’ll need to gather pay stubs, tax returns, bank statements, proof of employment, and investment account statements to prove your existing income. You’ll also have to provide the most recent mortgage statement and evidence of homeowner’s insurance.
Qualifying for a Home Equity Loan
Once you submit the required documentation, the lender will analyze these along with your credit reports. A credit score of 620 or higher indicates you’re an acceptable risk when lending money. They also examine your debt-to-income (DTI) ratio. This ratio is calculated by dividing your monthly debt payments by your monthly income. A lower DTI ratio indicates you’re an excellent qualifying candidate for the loan. However, if you think you won’t be able to qualify, there are bad credit loans available that you may be eligible for.
How Much Can You Borrow?
Lenders calculate how much you can borrow by using a loan-to-value (LTV) ratio. This ratio is calculated by comparing your mortgage amount with your home’s appraised value. The lender will order an appraiser to obtain a value. However, if the structures and property are severely damaged or destroyed by a natural disaster, the appraiser may utilize nontraditional means of assessing the fair value of your home. They can conduct property research to understand what your house was like before the disaster struck. They may gather details from a variety of sources, including:
- Physical inspections
- Tax records
- The homeowner
- The neighbors
Appraisers may also assess the value of your home by using hypothetical conditions, meaning that they would assign a value as if the repairs needed were already completed. In any case, once they assign a value, they divide the amount of your mortgage by the appraised value to calculate the LTV. Lenders usually approve home equity loans with an LTV of up to 85%.
Potential Risks and Considerations
It would be best if you understood that when you are approved for a home equity loan after a natural disaster, you are borrowing against the equity in your home, making it the collateral that secures the loan. A default on payments will result in a foreclosure.
In the aftermath of a natural disaster, property values in your area may fall because of any adverse effects on the properties in the immediate area. Now that the area is at risk for disaster to strike again, this can also cause property values to fall. If you already had a home equity loan before the catastrophe, this might mean you’ll owe more on your home than it’s now worth.
Home Equity Loans Are an Alternate Financial Resource for Rebuilding
Understanding home equity loans and what you can use them for if a natural disaster happens should give you peace of mind, knowing that other financial resources can help through turbulent times.