When you want to make a home improvement or pay off some of your debt, there are a variety of options at your disposal. One of these options is a no-income home equity loan. This type of loan was commonly available before the financial crisis of 2008. While it’s more difficult to obtain a no-income home equity loan today, some lenders still offer this loan type. If you’re thinking about applying for this type of loan, it’s important to understand how these loans differentiate from standard home equity loans. Standard loans are based primarily on a person’s income when identifying if the person qualifies for the loan.
As for no-income loans, they can be provided to borrowers without the borrower being required to verify their income. If you’re able to obtain this type of loan, the main qualifier will be your credit history. These loans are commonly referred to as no-income verification loans. For small business owners and self-employed individuals, it can be easier to qualify for a no-income home equity loan. If you don’t have W-2’s from an employer or don’t receive paychecks on a regular basis, no-income loans may be your best option.
During the financial crisis of 2008, many self-employed individuals who receive no-income loans ended up defaulting on the loan after losing their jobs or their main source of income. Since that time, a high percentage of financial institutions have become wary about providing people with no-income loans. Despite this wariness, these loans are still provided to borrowers who have credit scores above 700.
This article takes a comprehensive look at no-income home equity loans and how you can qualify for them.
The Difference Between a HELOC and Home Equity Loan
When you’re searching for the ideal loan, the two main types available to you include a HELOC and a home equity loan. While there are some core similarities between these two loan types, it’s important to understand the differences and how they impact you as a borrower. A HELOC is a home equity line of credit, which gives you a certain credit limit that you’re able to draw from when necessary. Because of how a line of credit is set up, it’s similar to a credit card. When you receive a line of credit, it will be available to you for 10 years or until you reach the credit limit, whichever comes first.
During the initial 10 years, you will only be required to make interest payments on the line of credit. Once the 10 years have passed, you will be required to repay all funds with added interest for a period of 10-20 years. A line of credit can have a low initial interest rate. However, these rates tend to be variable and will likely increase over time. The main benefits of a HELOC include:
- A low APR
- Tax-deductible interest
- Flexible repayment options
- Makes it simple for you to increase your credit score
You can also obtain a home equity loan, which is basically a second mortgage for your home. The loan is officially secured against your property and allows you to receive money in a lump sum. Just like a HELOC, these loans can be used for many different reasons and can help you pay down debt.
Since home equity loans use your property as collateral to secure the loan, your interest rates will be lower than what you would receive from a HELOC. As mentioned previously, the low initial interest rate that comes with a HELOC will increase significantly over time, which is why the interest rates for home equity loans are usually better. The main advantages of a home equity loan include:
- You’ll receive the money in a lump sum
- You’ll have a fixed interest rate that’s relatively low
- Possible tax deductions apply
Whether you need to reduce debt or pay for improvements to your home, both of these options can be beneficial.
Requirements for a HELOC and Home Equity Loan
Whether you want to apply for a HELOC or home equity loan, these loans have strict sets of requirements that you must be aware of. Understanding these requirements before applying for the loan can significantly reduce the possibility that your application is denied. Despite the differences between a home equity loan and a HELOC, the requirements are similar. These requirements include:
- Your down payment must be anywhere from 15-20 percent of the total value of the loan
- Credit score requirements are typically set at 700 or above but can be as low as 650
- Your debt-to-income ratio must be 43 percent or lower, which means that the amount of debt you currently have needs to be low to reduce the risk for the lender
- You need to have a sufficient income, which signals to the lender that you will be able to make payments on time
- You need to have a solid history of paying your bills on time, which indicates to the lender that you’re a low-risk borrower
For the income requirements, make sure that you’re able to provide recent pay-stubs or W-2s. If you’re seeking a no-income loan, you may need to provide bank statements.
How Does a Lender Vary By State?
Lenders for home equity loans will vary by state based on state rules and laws that may be in place. The main difference in lenders involves the interest rates that they attach to their loans. While federal guidelines indicate the preferred interest rate for banks and other financial institutions to adhere to, these lenders can still set their own rates, which means that the interest rates available to you can differ from lender to lender. You can check out this link to look at the average interest rates by state.
California, Massachusetts, and Washington have the lowest average interest rates. On the other hand, Iowa and New York have the highest interest rates. The average interest rate can range from 4.74-4.96 percent. The interest rates that you qualify for depend on your credit score. Borrowers with higher credit scores will usually be able to obtain lower interest rates. The interest rate that you pay dictates what your monthly payments will be. If your interest rate is relatively high, your payments will also be high.
How to Determine a No-Income Home Equity Loan Will Be Right For You
When you’re wondering if a no-income home equity loan is right for you, there are some factors that can make you a good candidate for this type of loan. If you’re finding it difficult to qualify for conventional mortgage loans, you might want to consider applying for a no-income home equity loan. The same is true if you are self-employed or bring in seasonal income streams. Any of these situations can make it difficult to properly show your income. On the other hand, no-income home equity loans are based primarily on credit scores, which makes them perfect for individuals who currently have a high credit score.
While these loans can be easier for you to obtain if you’re unable to properly verify your income, it’s still important that you don’t attempt to qualify for a loan if you won’t be able to make the monthly payments on time. If you don’t have the proper financial standing to obtain a home equity loan, wait until you do before you apply. As mentioned previously, you should have a credit score that’s at least 700 if you want to be approved for a no-income home equity loan. You will also need to provide a down payment or equity stake of at least 20 percent, which isn’t necessary with a conventional loan.
Potential Drawbacks
Before you apply for this kind of loan, you need to cautious of doing so because of the potential drawbacks that can occur. For one, the interest rates for a no-income verification loan are significantly higher than the ones attached to conventional loans. Depending on the amount of documentation you can provide to support your income, the interest rates that you pay can be anywhere from 1-5 percent higher than the market rates. Keep in mind that you’ll likely be required to pay relatively high interest rates even if your credit score is around 800. These loans are riskier for lenders to provide, which is why the terms will never be as favorable as they can be with conventional loans.
When you start the process of searching for the right no-income home equity loan, a mortgage broker or portfolio lender can organize the entire loan process for you. Real estate agents aren’t heavily involved with this loan process but can provide you with recommendations on lenders. If you currently have investment accounts or retirement accounts with a major financial institution, consider looking into their lending options to determine if they offer no-income home equity loans. Each lender will have its own qualifying criteria that you will need to adhere to. In most cases, you will be tasked with making large down payments, having a high credit score, and having a low loan-to-value ratio.
In order to make sure that you still bring in enough funds to cover the monthly payments, the lender will likely look at 6-12 months of bank statements, which will give them a better understanding of your cash flow. Multiple appraisals may also be requested for your property, which will allow the financial institution to determine what your equity stake in the property is.
While no-income home equity loans have their downsides, they can also be highly beneficial for anyone who’s been having difficulties qualifying for a conventional loan because of their lack of verifiable income. If you’re self-employed or don’t currently receive W-2’s from an employer, applying for a no-income home equity loan may be the only way for you to receive a loan.