Dear Dr. Don,
Hello, I own my home free and clear, and I need a personal loan to pay off a few credit cards, approximately $2,000 to $2,500 worth. I need a lender. I keep being denied for a $20,000 loan.
I thought if a home has no mortgage or lien and is free of debt, a lender wouldn't have a problem approving a loan. Best case, if I default, the lender owns a home valued at $260,000, for $20,000. Can you suggest what I should do?
-- Judith Jericho
The loan origination process involves examination of more than just the value of your home. Your income level is also considered. You own your home free and clear, but you've made no mention of the income available to make loan payments.
Another issue is you continuing to apply for personal loans. Every time you apply for a loan, it shows up on your credit report as an inquiry. Inquiries stay on your credit report for two years but only count against your credit score in the first year. Regardless, lenders reviewing your credit report see these multiple denied credit applications, and it's hard for them to justify extending a personal loan.
The credit score models allow multiple mortgage loan applications within a short period of time without counting it against your credit score because it's clear that you're comparison shopping. Otherwise, it makes you look like you're desperate for credit. Lenders hate lending to desperate people.
I'm also a little concerned you're trying to pay down $2,500 worth of credit card debt with a $20,000 personal loan. Sure, the loan needs to be big enough to get the mortgage lender's interest in lending you the money, but even a home equity line of credit in which you don't have to borrow the full $20,000 will have closing costs associated with the loan. Pay $250 to $500 in closing costs, and that's 10 percent to 20 percent of your outstanding credit card balance. You'd be better off using the money to pay down the credit cards.
A lender does not get the full value of your home if you were to default on the mortgage. They will go through the foreclosure process to capture the outstanding loan balance. You would be out of your house and responsible for the foreclosure costs, but any remaining equity is yours, not the bank's.
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