If you're looking to buy a new home and considering using an unsecured line of credit (ULOC) for your down payment, be sure to do a little research ahead of time. While this form of loan can be extremely helpful in your purchase, there are a few things you should know.
What is an ULOC?
As mentioned above, ULOC stands for an "Unsecured Line Of Credit". Unlike a secured line of credit such as a HELOC (Home Equity Line of Credit), this type of loan has nothing acting as collateral. This means the lender absorbs more of the risk on this type of loan - very similar to a credit card. Your ability to qualify for an ULOC depends on your own credit rather than any of your possessions or investments.
Personal Line of Credit
Many ULOCs come in the form of a personal line of credit. You would apply to the same institution where you do your regular banking and you would be able to make purchases and transfers just as you would a credit card. This type of unsecured credit may also allow you to receive up to $50,000 to put towards a down payment (depending on your banking institution).
How Does It Work?
ULOCs can have a much higher limit than any other type of unsecured loan. But this limit will be controlled by your lender based off of their evaluation of your credit. Along with that, you'll have a higher interest rate as this type of loan is high risk for the lender. You will also receive a monthly statement and in many cases a monthly minimum payment, pretty much just like a credit card.
Why Should I Consider a ULOC?
There are some great advantages to a ULOC. First - it's extremely convenient. Once you have one set up, you can write a check or withdraw money at an ATM; there's no waiting.
As you continue to use and pay off your ULOC you are building your credit score, as long as you are doing it responsibly and following the payment plan laid out with your lender. Also, it's not a one-time amount. You take out $5,000 for closing costs? Once you pay it back, that money is there ready for you to use again.
Who Is It Best For?
If you're wanting to purchase a new home and unable to use the equity from your existing home, an ULOC may be an ideal solution. Keep in mind, however, this type of loan is best for someone who has an excellent credit rating as it's based off credit alone. The lender is completely relying on your reputability with any previous debts or payments. In short, it can definitely provide you with some breathing room when it comes to buying and selling at the same time. Ideally, once your old home sells, you'll be able to pay back your ULOC in one fell swoop.
Now that you know the basics, you can decide if an ULOC is right for you. Be sure to talk to your lender about your personal line of credit options and how they can make the transition to your new home an easy one.