Home Equity Loan For Bad Credit

It’s well known that applying for a loan with a bad credit score is difficult and expensive. The good news is that you have other options. A home equity loan could be the answer to your financial predicament. We know how it feels to be in that position and all the stresses that come along with it.

There’s a misconception that people with bad credit are irresponsible, but often people with a poor credit history didn’t choose to be in the situation. It just happened over time.

They faced circumstances beyond their control, or they experienced unfortunate events that led them to a point where they need help.

It’s difficult for individuals who have bad credit to find an opportunity to start over. These people struggle when they are trying to get credit. You’ll be pleased to hear, then, that even if you do have bad credit, getting a home equity loan is still possible.

This depends on a few factors, which include your credit score. Let’s take a look at how that could work for you with a home equity loan.

How to Qualify for a Home Equity Loan With Bad Credit

A home equity loan that is secured against your house as collateral. Using your property as security gives the bank a degree of comfort, knowing that they can recover the loan amount should the borrower default. Effectively, you are borrowing against the equity in your home.

To be eligible for a home equity loan, you will need to meet several criteria. It’s also important to note that interest rates vary across lending institutions. Lenders compete with each other and may have differing qualification requirements. It’s essential to look around at all of the potential options available that match your current circumstances.

A person applying for a home equity loan with an abysmal credit rating may be to reduce their overall debt before they are approved for a new loan. Alternatively, the lender may request the applicant wait until there is greater equity in the home before they qualify. This could take some time and may become an issue depending on the nature of the housing market your property is in.

Certain factors can increase the chances of your application being successful. These include:

• A minimum of 15 – 20% equity in your home
• Credit score of at least 620 points
• Your debt to income ratio (DTI) should not exceed 43% of your income
• Some lenders are more lenient and accept debt amounting to 50% of your total income
• Provable stable employment and able to demonstrate your income history.

If your credit score is incredibly low, you may need to hold substantially more equity in your home and have a far better DTI ratio.

Why Should You Check Your DTI Ratio?

You should really be checking this often if you are thinking of taking out a loan. The higher your ratio, the less attractive to lenders you will be, so managing this is essential.

To work this out, you can use an online calculator or total all your debt (loans, credit cards, etc.) and then divide it by your monthly income. For example, if you earn $10,000 a month and your debts are $4,000, your DTI ratio will be 40%.

It’s vital to keep a check on your debts and to keep up with your payments. This is one of the biggest considerations when approving a loan for an applicant with a low credit score. You may also need to look for alternative finance to reduce your existing payments through consolidation.

How Should You Calculate the Size of a Home Equity Loan?

Once you have qualified for a loan, you will need to think about repayment term options. These tend to be from five to fifteen years, with typical loan amounts being between $10,000 and $25,000, depending on the lender.

Lenders may have minimum borrowing requirements and maximum loan amounts, and you can ask your chosen provider to disclose how they calculated your loan amount and terms.

Please note that a home equity loan is not the same as a home equity line of credit. The latter is an agreed amount that you can borrow, as and when you need it. You will only pay interest on the actual amount you are borrowing at any given time.

With a home equity loan, you borrow the full amount and pay an agreed interest rate on it for the entire term of the arrangement.

How Big of an Impact Can Bad Credit Have on Getting a Home Equity Loan?

Having a bad credit score will reduce your chances of getting a loan of any kind. The lower your score, the fewer offers you will receive.

Even if you do qualify for a loan, you will find that the rates are much higher than for people with a good score, and you might face stricter conditions. Your interest rate will be higher than others, which will increase your monthly payments.

The expected duration of the loan can also have an impact on the rate. Below is a table that shows the average rates and ranges of interest for different loan payment lengths. These figures are based on taking out a loan of $25,000.

What Are the Alternatives to Taking Out a Home Equity Loan If You Are Turned Down?

If you apply and don’t qualify, there are other options you can look into. Commonly, this would involve a personal loan or cash-out refinance. Let’s look a little closer at each one.

A Personal Loan

There’s no sure-fire way of knowing that you will be approved for this type of loan. They will do background checks and look at your score, and you still might get turned down.

Repayment periods are usually much shorter for personal loans, anywhere between six months and seven years. This may seem more appealing, but it will increase your monthly payments.

One factor to keep in mind is that most personal loans are unsecured, so this can increase interest by an alarming amount. Have a long, hard think about whether you will really be able to afford what you are agreeing to.

Cash-out Refinance

This term refers to paying off your current mortgage with a new loan. This will be a higher amount than the outstanding mortgage, and you receive the balance in cash. You will still need to prove home equity of at least 20%, so it may not be for everyone.

You need to consider the interest rates because you may find more favorable rates with a standard home equity loan. You could be paying it off for up to 30 years, and mortgages often come with hidden costs, too.

Friends and Family

If all else fails, you may want to ask family or even close friends. They are in no way obliged to help you out with money, but if they can, it could be to your advantage. They will often lend without any interest and may be more flexible about the period over which you pay it back.

Please be sure to pay them back on time, though. You don’t want to cause issues with those close to you over money.

So, Do Everything You Can to Boost Your Credit

Whatever it takes, you need to be sure you are doing everything possible to improve your credit score, so in the future, you will get better loan rates and enjoy less debt. How can you do this?

• Check your credit report in case any mistakes have been made. It’s rare, but it can happen.
• Pay bills on time each month. You can do this with minimum payments, but you should pay the maximum whenever possible.
• Try not to close credit cards. Even if they are paid off, it’s good to use a small amount so that lenders can see you are paying them off every month.
• Don’t get new credit cards, and do not max-out your existing ones.

The Bottom Line

Individuals who have poor credit scores need to remember that there are no quick fixes. It’s a lengthy process that requires attention and consistent effort. By drawing up a plan for improving your credit score, you are securing your financial future.

Financial institutions can be flexible with people who are eager to improve their financial standing. The journey may be a long one, but the reward once you arrive at your destination will be well worth the effort.