No-Credit-History Private Home Equity Loans

“No credit? Poor credit? No problem!”

Regardless of risk or verifiable ability to repay, many homeowners / borrowers are given no-credit-history private home equity loans. What are these loans, and how do some get approved while others are denied credit and private home equity loans?

Why would someone choose to risk their largest asset to borrow money if they do not have a solid credit/financial history?

A homeowner may choose to use the equity in their home as collateral for a loan to pay off other debts, such as medical bills, student loans, or repairs. Even those with bad credit or no credit occasionally need cash for pressing or unexpected expenses.

It is advised to avoid taking out the maximum approved loan amount, however, since it is your home that is “on the line.” But there is no regulation or restriction as to how the cash must be used once the loan is made and accepted.

The positive aspect is that, those with no, or bad, credit can raise their credit (FICO) score faster when they are approved, and when they do make timely mortgage payments. On that count, a no-credit-history private home equity loan is a real opportunity for homeowners to improve their credit and financial standing.

Before borrowing, consider that a home equity loan is a second mortgage, therefore adding to your overall debt.

“Equity” is the fair market value (or appraised value) of the home, minus any outstanding debt, such as the original, first, mortgage. That is, if the home is valued at $200,000, and the amount owed is $125,000, the equity in the home is $75,000. As a borrower, you may ask the lender to loan you cash based on the $75,000 equity.

It is easier to get a loan on equity. However, no credit, poor credit, or outstanding debt, may affect the interest rate or cause the loan to be denied. Banks and big lenders determine your ability to repay the loan. It is important to them that you exhibit a real ability to repay the additional debt, other debt is removed/consolidated as a result, and the loan is logical.

Mortgage brokers trying to secure equity loans or lines of credit for borrowers work with traditional loan companies. When a credit check indicates a potential credit risk, the lender denies the loan, leaving the mortgage broker with no transaction, and the borrower with no cash. Big banks and lenders have rigid credit criteria. However, private lenders do not. Private lenders tend to more readily approve no-credit-history home equity loans, especially if the loan is to pay off other debt.

Private lenders are small groups of private investors that do not follow strict credit criteria guidelines. However, they typically charge higher interest rates, points, or fees as a result of assuming the high-risk loan.

Some “bad credit private lenders” are “subprime lenders,” who will grant loans as soon as six months after a bankruptcy discharge. Their interest rates are extremely high; sometimes as much as 20%. Borrower beware.