Some non-traditional borrowers — such as those who are self-employed, have less-than-perfect credit, or don’t qualify through a traditional bank — may look to non-bank lenders for home equity financing. That can be a viable path in some cases, but there are important trade-offs to understand before going that route.
What Is a Non-Bank Lender?
Non-bank lenders are mortgage companies that issue loans without holding customer deposits the way traditional banks do. Instead, they typically borrow against lines of credit and sell the mortgages to investors. Many non-bank lenders played a significant role in the 2008 financial crisis by issuing loans to high-risk borrowers under these conditions.
Since that collapse, non-bank lenders have made a significant comeback and now account for roughly half of all loans packaged into new Freddie Mac securities. They tend to focus exclusively on mortgage loans and refinancing, and typically don’t offer deposit accounts.
Home Equity Loans vs. HELOCs
One key limitation of non-bank lenders is that many don’t offer home equity loans or home equity lines of credit (HELOCs) — two of the most common ways homeowners tap their equity for major expenses.
A home equity loan lets you borrow a fixed amount based on your available equity, repaid over time with fixed monthly payments.
A HELOC works more like a credit card — you’re approved for a maximum credit line and can draw from it as needed, making payments before a fully amortized repayment period begins.
Instead of these products, non-bank lenders typically steer borrowers toward cash-out refinancing. A cash-out refinance lets you convert home equity into cash by replacing your existing mortgage with a larger one — rather than adding a second loan on top of it.
For example, if you owe $250,000 on a home worth $500,000, you have $250,000 in equity. With a cash-out refinance, you might borrow $350,000, pay off your original mortgage, and walk away with $100,000 in usable cash.
Cash-out refinances can be easier to qualify for than other equity products because your home serves as collateral. Most lenders, including Refi.com, require a minimum credit score of 660 for a conventional cash-out refinance, though this can vary by loan program.
Why Non-Bank Lenders Often Skip Home Equity Products
After the financial crisis, traditional banks faced increased regulatory scrutiny and compliance costs. Non-bank lenders stepped in to fill the gap — particularly for borrowers with less-than-perfect credit — but they operate under different oversight rules and are typically privately owned.
Lower-income and minority borrowers disproportionately rely on non-bank lenders, partly because traditional banks have turned them away. But those same borrowers are also less likely to be offered home equity loans or HELOCs through non-bank channels. Here’s why.
Rate of Return
Non-bank lenders earn most of their revenue from origination fees, which are typically based on loan size. HELOCs tend to involve relatively small loan amounts — yet they cost roughly the same to originate, process, and close as a traditional first mortgage. That cost-to-revenue imbalance makes HELOCs difficult to offer competitively.
Interest Rates and Liquidity
HELOCs carry adjustable interest rates that fluctuate with the prime rate. Managing those rate changes — along with ongoing servicing and borrower draw activity — creates operational complexity that many non-bank lenders prefer to avoid.
There’s also a secondary market challenge: unlike first mortgages, home equity lines don’t always have a ready buyer once closed. That lack of liquidity creates cash flow problems for non-bank lenders, making HELOCs an unattractive product for their business model.
Ready to tap your home equity? Whether you’re interested in a cash-out refinance or want to explore other equity options, start your application with Refi.com today to see what you may qualify for.
