Is there such a thing as a guaranteed home equity loan? Just having sufficient home equity may not be enough for you to get a home equity loan. Read this guide to uncover the truth about guaranteed home equity loans and how to improve your chances of being approved. 

Understanding home equity

Home equity is a way of understanding how much of your home you actually own as you continue to pay off an existing mortgage. Until you repay all of your mortgage, the lender is the real owner of your home. However, buyers do accumulate value in their home in the meantime, known as home equity.

Your home equity can be worked out by subtracting your existing mortgage balance away from the current market value of the property. For example, a home worth £250,000 with a remaining mortgage of £100,000 will have £150,000 home equity. As a percentage, the homeowner would have 60% equity. 

What is a home equity loan?

A home equity loan is a type of loan that is secured by some of the home equity. This means failure to repay the loan can result in the lender forcing you to sell your home to give them the money back. The official name of this process is called foreclosure. Therefore, you risk losing your home if you take out one of these loans and do not pay it back. 

However, home equity loans can allow homeowners to access large loan amounts that they will not get elsewhere. And they usually have lower interest rates than many other types of secured and unsecured loans. Although this will depend on personal finances and your credit score. 

The loan is provided as a lump sum payment into your bank account, which you then start repaying the following month plus fixed interest. After a fixed period the loan will have been repaid.

Home equity loans Vs HELOC

A home equity line of credit (HELOC) also enables the homeowner to secure a loan against their home equity, but there are some important differences. The HELOC has a draw period where the homeowner can take the loan in stages over many months or years. 

Within the draw period, only the interest is payable, at a variable rate. After the draw period ends then the principal and a variable interest rate is paid back over a fixed term. 

How much will a bank lend on a home equity loan?

How much a bank is willing to lend as part of a home equity loan will be determined by individual circumstances, including existing debts, income and your credit score. 

However, they will not let you get a loan secured against all of the home equity you have because your property value could decrease, which would be bad for all parties. The maximum they will lend is usually around 80% of your home equity. 

There might be a minimum home equity loan amount around £10,000 – but not always.  

What is the current interest rate on a home equity loan?

Interest rates on a home equity loan and home equity line of credit are rarely published on lender websites. Instead, they will discuss the rate you might be offered in personal consultations and applications. The latest research suggests home equity loan interest rates average between 2% and 10%, subject to change. 

Are home equity loans guaranteed?

Just having sufficient home equity will not guarantee you a home equity loan. As part of responsible lending, lenders still need to assess your individual finances to work out what sort of loan you qualify for. And in some cases, they may decide that you are too much of a lending risk and will reject your home equity loan application. 

Some of the things they will need to assess include:

  1. Existing debts
  2. Income
  3. Debt to income ratio
  4. Amount of home equity you have
  5. Credit score

For these reasons, guaranteed home equity loans do not exist! 

What is a good credit score for a home equity loan?

Your credit score tells potential creditors how you have handled your finances in the past, and most importantly, how you have repaid any debts. Applying for a home equity loan is no different to applying for other credit and lenders will check your score extensively for red flags. 

There is no fixed benchmark of what credit score is good enough to be approved for a loan. Each lender has the freedom to apply their own assessment of personal finances and your credit history. What might not be high enough for one lender may pass with another – or pass based on accompanying factors, such as a high income.

You will typically need a “good” or “excellent” credit score rating to get a home equity loan with a competitive interest rate. 

Home equity loan guaranteed approval tips

Although guaranteed home equity loans might not be real, there are some things to improve your chances. They are:

  1. Don’t apply for more loans than you need. Just because you have home equity doesn’t mean you need to secure more of it against a loan. Borrow sensibly! 
  2. Check your credit score for mistakes and get them removed
  3. Improve your credit score before applying. There are many ways to do this, such as paying off debts. The score might not increase straight away. 

Can you get a home equity loan with poor credit?

Having a poor credit score can be detrimental to any type of loan application, including home equity loans and HELOCs. 

You might be rejected because of failure to repay previous loans or multiple payment defaults. Some things are almost certainly going to cause you to be rejected, such as bankruptcy or being taken to court by a lender and forced to repay by a judge (also known as a CCJ).

However, people with a fair or below-average credit score still have a chance of being approved. The terms of the home equity loan or specifically the interest rate may be less favourable. If this is the case, it may not be worth taking out the home equity loan anymore, especially if you are doing it for the purposes of debt consolidation.

How to get a home equity loan with bad credit

There is no magic recipe to get a home equity loan with a poor credit rating. You should do what you can to improve your score before applying, which may take some time. Seeking equity loan providers specifically advertising for people with poor credit is also an option. But again, you are likely to be subject to a higher interest rate. 

Guaranteed home equity loans – busting the myth! 

So, there you have it! Some of you may be almost guaranteed to be approved for a home equity loan – but that doesn’t mean guaranteed home equity loans really exist. Legal and responsible lenders have too many meticulous checks to make to be able to guarantee an equity loan to anybody. 

If you want more myth-busting articles and home equity loan information, stick with MoneyNerd. We’ve just published lots of new articles on these topics!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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