Definition: An equity lender is a type of lender that bases mortgage approval primarily on the equity or value of the property, rather than the borrower’s credit score or income. This form of lending is common in the private or alternative mortgage sector and is particularly useful for borrowers with unconventional incomes, lower credit scores, or those looking for financing on unique properties.

Key points:

• Focus on property value: Unlike traditional lenders, equity lenders assess the property’s market value and available equity (the portion of the property that the borrower owns outright) as the primary basis for lending.
• Loan-to-value (LTV) ratio: Equity lenders typically approve loans with a specific loan-to-value ratio, which limits the amount borrowed relative to the property’s value. Higher LTVs can mean higher interest rates, as the lender is taking on greater risk.
• Higher rates: Equity lenders generally charge higher interest rates compared to traditional banks because they take on more risk by lending to borrowers who may not meet standard income or credit requirements.
• Flexible underwriting: These lenders often offer greater flexibility in underwriting guidelines, which can be advantageous for those needing quick financing or who don’t qualify under conventional mortgage rules.

Note: Equity lending can provide valuable financing options for borrowers who need quick access to capital or cannot meet the strict criteria of prime lenders. However, the associated higher rates and terms should be carefully considered as part of an overall financial strategy.

Last modified: November 5, 2024