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Gone are the days when you had to depend on someone else or wait all your life to save enough to start or expand a business. Thanks to the many types of loans available, one can now focus on their passion. A home equity loan can be availed for any purpose and is available against both residential and non-residential property. Read on to know more about home equity loans for self-employed individuals.
What is a home equity loan?
Home Equity Loan allows an individual to take a loan against their home’s value while the home is still under home loan tenure. This loan gives one the opportunity to procure a large amount of money with their house as collateral. It is a relatively simpler method of borrowing money compared to other types of loans.
If the monetary worth of your home is higher than what you owe to the bank, then you can get this type of loan. Home equity loan for self-employed individuals helps them in securing more funds for their business or any other personal use. It is not bound with any restrictions that limit its usage to home-related expenses.
But it is important to note that you are taking a loan against your home and it comes with its own set of risks that you must avoid. The first mortgage will be your home loan which you have used for the purchase of your home. The home equity loan will be a second mortgage loan which you can use for other investments or expansion of your business.
Home equity loans can be obtained either as an adjustable-rate mortgage or as a fixed-rate mortgage. You can see which works best for you by weighing the pros and cons of both. Keeping in mind the rising interest rates will also help in making a sound decision.
Tips for getting a home equity loan for the self-employed
You may be well aware that getting any loan is more challenging for self-employed individuals. However, we have listed some tips that will help you get a home equity loan more easily.
Proof of income
Irrespective of your type of employment, your income is the primary determining factor to get a loan. If you are self-employed, special emphasis will be laid on your income and the proof of the same. Different lenders may ask for proof for different periods, and you must be prepared to provide the statements for the same.
Most often, self-employed individuals may already have some amount of debt. Debt-to-income ratio is of extreme importance, and almost all lenders consider this factor while giving a home equity loan. Usually, a maximum of 36% is acceptable, which should include all mortgages and loans. Needless to say, it is better to keep the percentage much lower to get a home equity loan easily.
It is imperative to check your credit report before applying for the loan. If there are any inaccurate statements on it, correcting and resolving them is important. It takes about two months for the corrections to show up on your credit score and it is advisable to apply for a loan after this. Another factor to keep in mind is to show at least two years of income that is consistent or else you may have to pay a higher interest rate. It is under these circumstances that a good credit score will help you get a reasonable interest rate.
Quite naturally, taking a loan further adds to the list of expenses that you have to incur on a monthly basis. Apart from your bills, home expenses, business expenses, you must also have ample funds to pay for your home equity loan or any other loans that you may have. Also, if you fail to pay up your monthly installments, you will be putting your home at risk. So while getting a home equity loan, you have to keep in mind all the expenses. It is advised to leave at least 20% of the home's equity value untouched in order to avoid paying private mortgage insurance.
Different lenders may come with different rates of interest, terms, and conditions. One must compare these options and check what works best before taking a loan. Self-employment is becoming more widespread these days, and not many lenders have provisions for the same. However, new loan options are being developed to cater to the growing number of self-employed individuals.
While you decide to get a home equity loan, make sure that you check your own priorities, expenses and the ability to pay back to avoid the risk of losing your home. So, keep these factors in your mind so that your home does not become a financial burden to you.
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