Loans For Homeowners: Is Equity Required?

Loans for homeowners are increasingly popular due to the advantages that they feature over loans for tenants or non homeowners. And even though it is not required to use the property as collateral for the loan, we receive more and more consults regarding whether it is necessary to have equity left on the property or properties in order to get approved for these loans.

This is a complex issue because though it is true that the property is not necessarily used as collateral for the loans, it is still a surety for the lender. Then it is not crazy to analyze whether equity is part or not of that guarantee. The answer would be yes but it is important to point out that it is not the only factor involved and thus, we should be able to measure how important it is in the overall qualification process.

How Equity Boosts Approval

The fact that there is equity available on a property provides tranquility to a lender even if the property is not used as collateral because the lender knows that in the event of default, even though the mortgage lender has privileges over the property, he can still collect from the remaining amount produced by the sell of the property if the balance on the secured loan does not exceed the value of the property.

In this sense, equity is important because it reduces the risk involved in the transaction consequently reducing the cost of it. Thus, someone with equity left on his property will most certainly be able to obtain the benefits that homeowners usually get when applying for loans whether they are secured or unsecured.

So, Is It Strictly Required?

Not really, being a homeowner does not necessarily imply that you have equity left on your property since you may have just acquired it or you may have obtained an equity loan for other purpose. However, the fact that you own a property implies that you have certain responsibilities that you cope with and that you are more reliable than those who do not own a property (at least at a first glance).

Therefore, a homeowner can get a loan with advantageous terms without having equity left on the property at all. Of course the most common scenario would be applying for an unsecured personal loan and getting better terms due to being a homeowner. Yet, there are home equity loans that offer up to 125% of the property’s value which implies that even without enough equity; you can still obtain a home equity loan especially if the loan will be used for making home improvements.

Other Requirements Are Still Mandatory

Of course, this does not imply that by being a homeowner you will not be required to meet the usual conditions for approval. Actually, you will still be required to show proof of income and meet the credit requirements to qualify. Yet, if you are a homeowner, the requirements for approval will be less harsh as the lender is running a lower risk by lending to you than by lending to a tenant.