The no-income home equity loan is getting popular in Canada thanks to its relief in times of financial adversity. A financial crisis can hit anybody at any time, and the recent COVID-19 pandemic has seconded this.
Despite having spent their life savings and emergency funds, homeowners still have the option to secure a loan on their home equity. The good news is that borrowers can easily avail a home equity loan even without having a source of income. Check out this article to know more!
The question is–is it that easy to secure a home equity loan without an income? The answer lies in succeeding paragraphs!
What is Home Equity?
Home equity is defined as the house’s current market value minus any lien or unpaid mortgage. For instance, if the current value of a house is $300,000 and the owner owes $150,000 on a mortgage, $150,000 is the home equity.
Note that home equity varies with time. Depending on the market and your house’s conditions, it may go up or down.
Understanding Home Equity Loan
A home equity loan or second mortgage is a type of loan secured by the borrower’s home equity. Lenders take home equity as collateral for securing a loan amount.
Furthermore, it’s much easier to secure a loan against home equity. But before jumping to conclusions, let’s look at the pros and cons of a home equity loan.
- Borrowers have the freedom to achieve financial needs by encashing their home equity
- A fixed interest rate
- Lower interest rates compared to other types of loans
- In certain cases, the payment of interest qualifies as tax-deductible
- It is more beneficial if the loan amount is used to renovate/remodel the house. This increases the value of the property.
- As the house is used as collateral, defaulting on payments leads to putting a lien on the house or, in worst cases selling the house.
- In the case of a second mortgage, paying two monthly installments can burden the borrower.
No Income Home Equity Loan: How it works?
Income proof and a good credit score are musts to avail of any loan. Individuals with no or irregular income face many difficulties in securing conventional loans. Mostly, they face rejection or arbitrary rates of interest.
Irrespective of the income, lenders’ prime concern is the borrower’s home equity. The house becomes the security for the loan amount. Simply put, it’s a type of mortgage. For lenders, the risk becomes minimal in the case of home equity loans.
Generally, a house owner can get 80 percent of the home equity. However, in the case of a second mortgage, the interest rate could be much higher than the previous one. Note that some other types of administrative fees may be applicable as well, such as:
- Appraisal fees
- Title search
- Title insurance
- Legal fees
Types of No Income Home Equity Loans
Here are the five types of no income home equity loans you should know about:
1. Prepaid home equity loan
If the borrower has made prepayments on the first mortgage, they have the option to borrow the total amount of all the prepayments made.
The disbursed amount is then added to the first mortgage. The rate of interest, in this case, will be the same as the first mortgage, or a blended interest rate is charged.
2. Home equity line of credit (HELOC)
It is a revolving line of credit granted based on home equity. The borrower can draw, pay it back, and then draw on again for a defined period like a credit card.
Moreover, variable interest rates make it much more attractive. HELOCs are calculated on 65 to 80 percent of your home’s appraised value.
3. Reverse Mortgage
Generally availed by senior citizens, who can utilize a reverse mortgage against home equity in a lump sum, fixed monthly payment, or line of credit.
Moreover, there is no need to pay installments on this loan. Instead, the entire loan amount is adjusted in a single go when the borrower sells the home, dies, or moves away.
4. Stated Income Home Equity Loans
Persons working as salesmen or commission agents find it hard to document their source of income. A stated income home equity loan can be beneficial in this scenario–no income proof is required in this category.
5. Home Equity Loan Requirements
Remember–it solely depends on the lender on how he chooses to govern the loan terms. But in most cases, a borrower needs to have more than 20 percent equity in their home after adjusting all liabilities.
Note that an unemployed individual or a person with a low credit score can also avail of a home equity loan.
Benefits of Getting a Home Equity Loan with No Income
Here’s why you should consider getting a home equity loan with no income:
1. Easy to secure
Using house equity as collateral can help secure the loan quickly and easily. This way, people in the no-income group remove the hassle associated with availing of a loan. Also, the chances of approval are maximum in this category.
2. Lower interest rates
Even if an unemployed individual qualifies for a loan, the interest rate on an unsecured loan will be too high. On the contrary, home equity loans come with much lower interest than other loans.
3. A powerful tool to meet the financial goals
Even if a borrower has spent all his savings and emergency funds, he can meet his financial goals using a home equity loan.
4. Keeps the equity growing
The borrower remains the property owner even after signing up for the loan–the house equity grows with time. Therefore, the borrower reaps the benefit of equity growth after successfully completing the mortgage term.
5. Larger loan amount
Depending on the extent of appraisal in a home’s value, a borrower can avail up to 80 percent of the home equity. Extracting such a huge amount is impossible for a person with no income.
While a home equity loan is an attractive option for individuals with low or no income, borrowers must always assess their repaying capacity.
Taking up home equity beyond your repaying capacity can lead to a lien on your house and could even mean selling your house.
Therefore, conduct a thorough analysis of your financial needs before zeroing in on the loan amount.