No Equity Loan

A no-equity loan is another name for a high loan-to-value home equity loan. Originating in the mid-to-late 1990s as a way for homeowners to borrow more than their homes were worth, no-equity loans have fallen out of favor with most banks due to the current housing and mortgage crisis. However, a handful of financial institutions still offer such an option to the cash-strapped or desperate—precisely the customers who should not take out no-equity loans.

The premise behind the no equity loan is simple: the loan offers money to individuals who do not have the equity for a traditional second mortgage or home equity loan. The amount above and beyond the home value can be as high as 25%. No-equity loans may be a good option for individuals who cannot qualify for a traditional mortgage, but wish to obtain additional monies in order to pay off variable revolving debt. It is very common for individuals with a large amount of credit card debt to acquire such a loan; no-equity loans usually have a fixed interest rate and allow the consumer to plan for the monthly payment, instead of ever-changing monthly credit card bills. While this may sound appealing to some, there are a number of cons associated with a no-equity loan. First, unlike a traditional home-equity loan, interest paid is not tax deductible. Second, if the house must be sold and can only be sold for a portion of the owed debt, the remainder of the debt must be paid by the consumer. This can present a problem, especially if the amount owed is in the tens of thousands. Some lenders require private mortgage insurance on the secured part of the no-equity loan, or the portion that equals the value of the home. One of the biggest negatives for most individuals is the interest rate tacked onto a no-equity loan. High loan-to-value loans have interest rates two to six points higher than other types of equity loans.

For consumers who still wish to obtain no-equity loans, they should first check with their personal banks. Often, better rates can be attained when dealing with a familiar company. Potential borrowers should inquire if the financial institution is a member of NHEMA, or the National Home Equity Mortgage Association. Also, borrowers must meet all financial requirements to obtain a no-equity loan. Credit scores are considered, although some institutions are more lenient on scores than others. Scores lower than 600 are generally considered to belong to high-risk consumers, though lenders may approve an individual with scores as low as 580. Due to the current mortgage crisis, lenders such as 125 Credit and BD Nationwide require a minimum score of 700 to qualify. Debt-to-income ratio is a primary concern. To obtain one’s ratio, monthly debt should be divided by monthly income. Debt-to-income ratio should never exceed 0.36. Finally, consumers should perform a self reality check before getting a no-equity loan. If the individual is uncomfortable taking on debt with a high interest rate, it is advisable that other means be explored.