Your guide to home improvement loans with no equity

Your guide to home improvement loans with no equity

Home improvement loans can bridge the gap between your dream project and your bank balance—but with so many options today, it can be confusing to know which type of loan is right for you.

Basically, you have three main financing tools to pay for a renovation project: Home equity loans or lines of credit, home improvement credit cards, and personal home improvement loans with no equity.

Today, we’re going to talk about when it makes sense to use a no-equity home improvement loan to finance your renovations and repairs.

Here’s when it makes sense to get a home improvement loan with no equity

You lack sufficient equity in your home

If you’re a new homeowner, or you bought your home with a low-money-down FHA loan, chances are good you won’t have enough equity in your home to qualify for a loan. The truth is that traditional lenders won’t give you home equity financing if you exceed the combined loan-to-value (CLTV) underwriting standards.

CLTV is the ratio of the total amount of loans against your home, including the proposed new loan, compared to the appraised market value of your home.

Here’s how it works: Suppose your home has a market value of $425,000 and your existing mortgage is $350,000, and you want to borrow $25,000 for a bathroom remodel. Your CLTV would be 88% ($350,000 + $25,000 = $375,000. $375,000 ÷ $425,000 = 0.88, or 88%).

Most lenders require a CLTV of 80% or lower to make a home equity loan, so in this case, you wouldn’t qualify based on your existing equity.

It’s a good number to keep in mind before you approach a bank or credit union about a home equity loan or line of credit—there’s no point in paying a loan application fee if you know you won’t pass basic underwriting standards.

According to data in CoreLogic’s Equity Report, about 25% of homeowners fall below that 80% equity figure on their first mortgage, so the number of those with sufficient equity to qualify for a home equity loan would be significantly lower.

You have an urgent repair or renovation project and need money fast.

Did you know you can apply for a personal home improvement loan today and have the money in your bank account tomorrow? In many cases, it really is that fast. The free online application process takes just a minute or two, and you usually get a decision almost instantaneously. And if you like what you’re offered, you simply send in proof of income and identity, and the loan is funded in just a day or two.

Contrast that with the home equity loan approval process. It’s not quite a rigorous as applying for your first mortgage, but it’s still pretty complex. Once you submit an application, your lender will order an appraisal, a title search, and complete a host of other paperwork before your loan is funded. It can easily take four to six weeks from start to finish—way too long if you’ve got a flooded bathroom or a hole in your roof that needs immediate attention.

Time can be a major consideration, even if your project isn’t urgent. Let’s say you’ve planned out the perfect bathroom remodel—met with a designer, picked your materials, even interviewed and selected the best contractors for the job.

If you can’t pay them to start the work right away, they may not be available to do it when your home equity loan comes through. You may have to settle for your second- or third-choice contractor—or push the work back months until your first-choice professional is free again. And all the while, you’re paying interest on your loan.

If you’ve got a project ready to go and you need the cash right away to lock in your crew, a personal home improvement loan may be the best way to go.

You don’t need to borrow a lot of money

There’s a huge difference in financing needs if you’re looking at a total high-end kitchen remodel (which can cost $50,000 or more) versus replacing an aging and worn asphalt shingle roof (which costs around $10,000 to $15,000).

For less expensive projects, personal loans may be the smarter choice, even if the interest rates come in a bit higher than a secured home equity loan.

Here’s why: There are a lot of upfront fees associated with home equity products. Because they essentially function as a second mortgage, you’ll have application fees, appraisal fees, title fees, document fees, loan origination fees, maybe even points to lock in your interest rate.

Sure, a lot of lenders will offer to pay some or all of your closing costs—but there’s always a catch. In most cases, if your lender fronts some costs, you’ll be charged a hefty prepayment penalty if you want to close out your loan before the term is complete. And home equity products usually have fairly long terms—10, 15, even 20 years. If you don’t mind paying for your new roof for the next 20 years, that may not be a bad thing.

But if you want to pay it off early and get rid of a monthly payment, you’ll be charged by your lender to do it.

And then there’s compound interest. A $15,000 home equity loan at 5% for 15 years will cost you almost $6,400 in interest payments alone.

That same $15,000 borrowed with a 5-year personal loan at 9% APR will only cost you $3,600 in interest. And the only fee you’ll pay your lender is a simple loan origination fee when the money is disbursed.

Imagine what you could do with that extra $3,000 to $4,000 you saved?

You don’t want to use your house as collateral

Your house is a lot more than just a place to call home—it’s likely your most significant financial asset, at least if you’re early or mid career. The equity you build over time is an important resource as you plan your personal financial goals. When you tap it with a home equity loan, it costs you a lot more than just the loan amount in lost appreciation and wealth-building opportunities. This is especially true if you use the money for something that doesn’t appreciate, like a new car or a vacation.

Sucking the equity out of your home today can cost you tens of thousands of dollars in real asset value over the long term.

Then there’s the risk of losing your home if you can’t keep up with your payments. The unexpected does sometimes happen—and it can happen to you. A serious illness or injury, a round of layoffs at work…any of those things can make it impossible for you to make your scheduled loan payments.

If you’ve pledged your home equity for a loan, your lender can—and usually will—foreclose on your home to cover your debt. It’s not a risk to take lightly.

Personal home improvement loans are unsecured; all you need is good credit, proof of income, and a signature. If the unexpected happens and you can’t pay it off on time, your credit score will take a hit, but your home is safe from the auction block.

You have less than perfect credit

Traditional lenders like banks and credit unions aren’t likely to consider you for a home equity loan if your credit score is below 700. They have tight underwriting standards that don’t leave much wiggle room for people just starting out or rebuilding credit.

Online personal home improvement lenders, on the other hand, are able to approve loans for those with less-than-perfect credit. Most look for a credit score of 640, although some will approve loans with scores below that. Of course, you’ll pay a higher interest rate if your credit is poor, but if you need money for an urgent and necessary repair, you stand a much better chance of getting it with an online personal loan than through a home equity loan with your bank.

You need dependable monthly payments and a reasonable loan term

Many home equity products have variable interest rates, which means your payments go up when interest rates rise. You may get in with a low introductory rate, but over time, your payments skyrocket as the variable rate kicks in. In fact, if you’re not skilled at deciphering the small print, you could wind up with totally unmanageable and unexpectedly high payments in just a few years.

With personal home improvement loans, your interest rate is fixed over the life of the loan. You know exactly how much your payments will be every month until the loan is paid off—no hidden surprises.

And you can pay for your new roof (or whatever you use the money for) in a reasonable amount of time—generally between three and seven years. The shorter terms let you keep your payments low and still pay off your loan and eliminate a monthly payment.

Home equity products tend to have much longer terms; 20 years or more isn’t uncommon! Those payments become a permanent fact of life for many homeowners.

Personal home improvement loans are generally the most transparent and straightforward financing option, which is a huge bonus when you’re setting up a budget.


If you’re looking for a home improvement loan with no equity, you can compare options in 60 seconds through Hearth!