How to Use My Home As Collateral for a Loan

Any collateralized loan is called a secured loan. When the collateral used to secure a loan is a piece of real estate -- whether it be land or a house -- that loan is called a mortgage. There are several types of mortgages -- first mortgages, second mortgages, equity loans -- but they are all secured loans. It's fairly easy to obtain a mortgage once you establish your previous ability to repay debts.

Step 1

Pull a current copy of your credit report. You'll need to prove to any prospective lender that you are a responsible borrower. Also obtain your FICO score -- a three digit number between 300 and 850 -- that will tell you your creditworthiness.

Step 2

Use a mortgage calculator to determine how much you'll need to borrow and the resulting payment. Using this payment and your other expenses, calculate your debt to income ratio (DIR). This ratio tells the lender that you have the ability to repay the loan. To find your DIR, divide your monthly expenses by your gross monthly income. Most lenders want to see a DIR under 40 percent.

Step 3

Research the type of loan you want to obtain. Conventional fixed-rate mortgages offer a set term (e.g. 30 years) and a set monthly payment. Home equity lines of credit (HELOCs) are revolving loans that can be repaid and re-accessed. HELOCs are flexible and are ideal for home repairs and remodeling projects.

Step 4

Research lenders based on your FICO score and the type of loan for which you are looking. Banks and credit unions offer the most competitive rates and programs. You will need excellent credit (a FICO score over 720) to apply at these institutions.

Step 5

Apply at several lenders to get several options. Compare them all side-by-side and make sure the one you choose meets your short- and long-term goals.