Bad credit can be a problem when it comes to obtaining financing approval, however, home equity loans or lines of credit are not completely out of your reach. Here’s what you should know about getting home equity loans with bad credit and how you can increase your chances of being approved.
A home equity loan is defined as a type of loan that is secured by the borrower’s home and which allows the borrower to borrow money based on the amount of equity he or she has in their house.
Home equity loan allows a homeowner to borrow money on the basis of the value of the home they own. Equity refers to the amount of money that is owed on your mortgage and the current market value of the home. For instance, if your home is valued at $250,000 and you have a mortgage of $175,000, you have $75,000 of equity.
Home equity loan work in a way that you borrow a lump sum of money at a one-time close and expect to pay equal monthly payment over the loan period, which may range from 5 to 30 years. It can go up to 85% of the acceptable value of your home, less the balance on your mortgage. The interest on home equity loans are often slightly higher than the interest on the first mortgage.
Home Equity Loan Vs Home Equity Line of Credit
Another credit option is a home equity line of credit, also known as HELOC. HELOC resembles a credit card where a borrower is provided with a specified amount of money that he can borrow at any given time he wants. This means that you will only incur interest charges to the amount you spend and not the total credit limit you are given.
In general, interest rates for HELOCs are lower than those for home equity loans, and there are greater possibilities of repayment. However, the HELOC limits vary depending on the home value reduction and the credit freeze or closure in case of missed payment.
The reality is that it may not be possible to get approved for a loan with bad credit score
It is important to note that home equity financing is not recognized by lenders in the same way as traditional personal loans. However, even if you are not in a very good standing with your credit score you can easily qualify for a home equity loan or HELOC because your home acts as collateral for the loan. If you fail to pay the loan, the lender can repossess your house in order to recover the amount owed.
However, credit score of at least 620-640 is preferred by the lenders to home equity lending applicants. The higher the score, the better the loan terms will be and the lower your score the worse the loan terms that are offered to you will be. Here are some tips for getting approved:Here are some tips for getting approved:
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Shop with lenders that understand bad credit borrowers – most online lenders such as LendingTree or credit unions are more lenient than conventional banks.
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If possible, choose a fixed rate loan rather than an adjustable rate mortgage – ARM initial charges a lower interest rate then adjust it later, raising the over time cost.
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Reduce your debt to income ratio as much as you can – a preferred threshold for most lenders is to keep this below 50%.
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Some of the cash you borrow should be used to pay off revolving credit – this will reduce your DTI as monthly payments decrease.
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Talk about willingness to pledge other assets such as the second home, investment property - it works in favor of the lender.
- Use it together with a creditworthy - guarantor who will pay in your behalf, in case you default.
Home Equity Loan Rates For People With Bad Credit
Those with a lower credit rating can expect to pay more for interest and interest can fluctuate from one lender to another greatly. Remember to seek several quotes from the various lenders to ensure that you get the best rates. Here are some ballpark estimates for home equity loan rates based on credit score tier:Here are some ballpark estimates for home equity loan rates based on credit score tier:
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Exceptional Credit (780+ score): 3% – 5%
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Very Good Credit (740 - 779 score): 4% – 6%
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Good Credit (670 - 739 score): 5% – 8%
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Average Credit (620 - 669 score): 8%-12%
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Poor Credit (580 - 619 score): The incidence of atypical depression ranged from 13% to 18%.
- Very Poor Credit (below 580 score): not be eligible
Besides, your credit score, DTI, LTI, and lenders’ rates also affect the home equity loan rate that you will be offered. In that case, getting quotes from different lenders helps to avoid missing out on potential savings.
How to Use A Home Equity Loan for Your Benefit
If employed prudently, a home equity loan or HELOC is more convenient and cheaper than other forms of financing such as credit cards and personal loans. Of course, one should never take more than he/she is able to comfortably repay the borrowed sum back. Trying to take on too much could cost you as far as the home is concerned.
Avoid these common home equity loan mistakes:
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Using more than the amount required for a project
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Spending money for things like traveling, going for a holiday or buying expensive items that are not necessities
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Choosing an adjustable-rate loan without knowledge of the consequences
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Missing payments
- Continuing to borrow up to the credit limit.
Remember to pay the interest besides the actual loan amount and ensure you have some cash saved for the rainy days such as losing your job or facing other misfortunes. If controlled properly, home equity financing can be a great means of accessing the value of ones home even when the credit history is not the best.
