How to Qualify for a Home Improvement Loan with No Equity

Getting a home improvement loan with no equity is not an easy accomplishment. Most home improvement loans are actually home equity loans, which means they use the value of a home you own or partly own as collateral on the loan amount. When a homeowner has no equity, the homeowner will need to find other sources of collateral or use an unsecured loan.

Sources of Collateral

Essentially, any asset can be used as collateral, not just a home or large asset. If you have a savings account or stock certificates, then you can use these to secure a loan in a small amount. A savings-secured loan means the lender will hold your certificate for a period of time until the loan is paid off. In a savings-secured loan, the lender will place a freeze on your savings account and issue you a loan against that account. In both instances, you will gain the benefits of a secured loan such as lower interest rates. However, secured loans do pose more risk to the borrower, since you can have the asset seized in the case or default. To take a loan without the risk, consider using an unsecured loan.

Unsecured Loans

Unsecured loans are typically more costly. The lender has no assurance against losing the money if you default on the loan. Whenever the lender is assuming more risk, the lender will impose more regulations on you and charge you more. For example, borrowers must have excellent credit to get an unsecured loan. Borrowers must also have a high amount of income compared to their existing debt. Lenders will want higher monthly payments as well, shortening the length of the loan. While home equity loans are commonly distributed in lengths of time up to 30 years, unsecured loans are typically issued in 7-to-10-year terms. 

Unsecured Credit Lines

One of the key problems with an unsecured loan is low limits. A lender will not issue a very large loan with absolutely no guarantee of repayment. You may have a hard time covering the expense of your home improvement project with this low limit. In this case, consider an unsecured credit line. If you receive a credit line for $10,000, you can start your project with that credit. Once you pay down the balance on the card, your limits will refresh, and you will be eligible for another $10,000 of credit. This can be extended for many years to pay for a costly home improvement project.

Second Mortgages

Even if you do not have equity in your home, you can still use it to secure cash immediately. This is the riskiest option, and it will generally create the largest amount of debt. You can seek a lender willing to give you a loan much larger than the amount you owe on your house. You can then use this loan to pay off your initial loan, and you can pocket the difference of the two sums. You will owe significantly more on the home than it is worth, so you should only pursue this option if the others will not work for you.

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