Five Ways to Tap Home Equity if You’re Self-Employed  

Key takeaways 

• Self-employed homeowners face unique challenges in tapping their home equity. 
• Weighing the pros, cons and qualification requirements of each option to tap home equity is critical for self-employed individuals. 
• A no-loan home equity agreement can be a good option for self-employed homeowners, since qualification requirements are more flexible than with traditional loan options. 

Homes have been called the country’s piggy bank. As of early this year, the St. Louis Federal Reserve reported that they were collectively worth a record-high total of nearly $33 trillion, more than double the value in early 2017. The number represents the value of all homes, less any debt carried on them (including mortgage debt). 

Accessing that value takes a little effort, though, since home equity is not liquid, like cash or other assets that can be quickly converted into cash (such as CDs and stock shares). Traditionally, homeowners have turned to home equity loans, home equity lines of credit or cash-out refinances. But the 10 million Americans who are self-employed may find these loan-based choices challenging, due to often strict proof of income requirements.   If you’re one of those 10 million who own a home, you’ll want to carefully consider the pros, cons and issues of each available option to access your home equity. 

1. Cash-out refinance 

A cash-out refinance involves taking out a new mortgage to replace your current one. Homeowners looking to access their home equity through a cash-out refinance get a mortgage for more than the amount they owe on their current mortgage and take the difference in cash.  

Even though mortgage rates may be falling a bit, they are still much higher than they were a few years ago, and the likelihood of them dropping to those ultra-low rates any time soon is slim. Unless you bought a home very recently, cash-out refinancing rates are likely still much higher than the rate you are currently paying on your mortgage. For most people, the market does not present a good opportunity for a cash-out refinance. 

In addition, getting a mortgage requires plenty of time and documentation, a good credit score and, usually, proof of income. While submitting years of tax forms may help self-employed borrowers meet income requirements imposed by traditional lenders, the process is onerous at best. 

2. Home equity line of credit (HELOC) 

A home equity line of credit is just that: a line of credit. You can draw on it, up to the amount extended to you, as you need it. Some lenders now offer fixed-rate HELOCs, but most are variable-rate. That means that the interest rate can change throughout the loan’s term, and with that, so can the monthly payment.  

Since a HELOC is a loan, you would qualify for one based on your credit, your home’s loan to value (LTV) ratio and your debt-to-income (DTI) ratio.  

Each lender is different, but you’ll generally need a credit score of at least 620. Many lenders require a score of 680 or higher. The higher the score, the lower the interest rate you can get. 

LTV is the amount of the HELOC line divided by the value of your home. Specific requirements will vary by lender, but most will require an LTV of 85% or lower. DTI is the percentage of your monthly income that goes to debt payments. Many lenders require a DTI of no more than 36%, but some may accept one as high as 43%. 

In addition to DTI, many lenders want to see that you have stable income over a period of time. This can present difficulties for many self-employed individuals, as they can’t provide pay stubs as proof of income.  Some lenders may accept several years’ of tax returns instead.  

3. Home equity loan (HEL)  

A home equity loan provides a lump sum of money at an interest rate that remains fixed for the life of the loan. Because it, too, is a loan, qualification requirements are the same as those for a home equity line of credit. 

4. Reverse mortgage 

For a self-employed homeowner aged 62 or older, a reverse mortgage could be an option. This type of mortgage works the opposite way that a traditional forward mortgage does. Instead of the homeowner making a monthly mortgage payment, the lender pays the homeowner a monthly amount. In exchange, the lender receives an increasing share of the home’s equity.  

Reverse mortgages come with complexities and risks. While there is no income requirement, homeowners must pay closing costs, which are often higher than those of traditional mortgages, as well as origination fees, loan servicing fees, monthly mortgage insurance premiums and an upfront mortgage insurance premium. They’re also required to complete a federally approved counseling session (for a nominal fee). 

A reverse mortgage ends when the home is sold or when the homeowner passes away. Homeowners are also at risk of losing the home if they fall behind on property taxes or insurance payments, let the home fall into disrepair or move out for any reason (including medical necessity). 

5. Home equity agreement (HEA)

A home equity agreement (HEA), also known as a home equity sharing agreement or home equity investment agreement, is a relatively new option to access home equity. Since it is not a loan, qualification requirements are more flexible than those of the other options we’ve discussed.  

In an HEA, a homeowner receives cash up front in exchange for a portion of the future value of their home. Since it’s not a loan, you are not taking on additional monthly debt payments. Credit scores as low as 500 may qualify, and income requirements are flexible, making the HEA a more viable option for many self-employed individuals. 

The HEA ends when the homeowner buys back their equity. That’s often at the end of the term (typically 10 years) or when they sell the home. Unlock allows homeowners to buy back their equity in partial payments throughout the term of the agreement. 

Weighing the options 

If you are one of the millions of American homeowners who has accumulated significant equity in your home, kudos to you. Your home can indeed serve as your own piggy bank from which to pull. As a self-employed person, you’ll need to consider the pros, cons and qualifications requirement of both loan-based and no-loan options to tap that home equity. 

If you choose a HELOC or home equity loan, remember that it will come with an additional monthly debt payment. Is taking on another monthly payment a good idea if your income fluctuates? Does another payment fit comfortably into your budget? Also keep in mind that if you choose a loan option, you are using your home as collateral. If you were to miss payments for any reason, you would potentially risk foreclosure on your home. 

An HEA, with its flexible income requirements and lack of monthly payments, can be a good fit for self-employed homeowners.