Can I Finance a House With an Unsecured Loan?

When it comes to mortgages, you might think that the only option is a traditional secured loan. While this is the most common type of mortgage loan, some financial institutions also offer another option, the unsecured home loan, a loan which does not require collateral, not even the house. However, while this type of loan sounds like a dream come true, qualifying for one is very difficult and you may end up paying more in the long run.

Unsecured Loans Vs. Secured

Most mortgages are secured loans, loans that are attached to some kind of collateral. In the case of a home loan, the collateral is the house itself. Unsecured loans, however, have nothing held as collateral. If the homebuyer defaults on an unsecured loan, the lender cannot claim rights to the property. The advantage of a unsecured home loan is that, even though the lender may sue if payments are not made, the buyers run less risk of losing their home if they default. However, getting this mystical, magical unsecured loan is a difficult process. To begin with, the underwriting standard for an unsecured loan is far more detailed than for a normal loan. What this means is that you may need near perfect credit and will have to jump through a great many hoops to qualify. Also, unsecured loans generally have shorter loan terms, which mean higher monthly payments.

Credit

Financing a home generally requires a good credit score and solid credit history as lenders want to make sure you will be able to pay on the loan faithfully each month. With a traditional secured loan, lenders have the added cushion of being able to take your home if you default on the loan. However, unsecured loans offer no such protection for the lender. Therefore, if your credit score is poor or average, chances are you're not going to qualify for an unsecured home loan. Even those with credit in the above-average category may not be eligible, depending on the lender and the terms of the loan.

Shorter Terms

Regular home loan terms generally range from 15 to 30 years. The longer the term of the loan, the smaller the monthly payments for the buyer. However, since unsecured home loans present a bigger risk for the lender, they are often capped at a much shorter term. The loan range may be from five to 10 years. This will mean much higher monthly payments, and for the buyer, it may mean purchasing less house than you would like.

Interest

Yes, the lenders check credit scores, credit history and offer limited loan terms, but that still isn't enough to really offset the risk to them. So if you decide to go with this kind of loan, you may end up paying for it in interest. Because the lenders may still be fearful of a default, and of having no collateral to claim, many lending institutions will charge much higher interest rates for unsecured loans than for a traditional mortgage. This higher interest rate will not only increase your payment, but may also mean that to qualify you'll need a higher income.

About the Author

Casey Anderson is a part-time writer and full-time marketer who has been published on websites such as Opposing Views and Salon. She has also contributed articles to local Detroit Magazines, Strut and Orbit. A Wayne State University Master of Business Administration graduate, Nation began her writing career in 2001 and has extensive experience in business and research writing.