If you are a homeowner with bad credit score, then you might be wondering whether you can borrow money by using your home equity. Even though lenders consider borrowers with low credit scores as higher risks, one can still be approved for a home equity loan or line of credit with a less than perfect credit. The keys are knowing what lenders look at, fixing some aspects of your credit, picking the right lender, and submitting paperwork to counterbalance negative credit data. Here are some tips that may help you get home equity financing even if you have a bad credit rating:
It is also important for you to check your credit reports and scores. The first step is to obtain a copy of your credit report from the three major credit bureaus, namely Equifax, Experian and TransUnion. Scour the reports diligently for any information that may well be depressing your scores unnecessarily. Challenge these issues with the credit bureaos and your credit scores may improve. Lenders suggest at least 620 before opting for a home equity loan or HELOC. If your scores are far below that, you should probably delay your application for a few months, gather more points in order to have them move up before a lender approves your application.
What is the amount of capital you have in your business? In order to find out if you qualify for home equity financing, you need to calculate how much home equity you have. Home equity is determined by the difference between the current market value of the home and the outstanding balance of the mortgage. Lenders usually allow you to borrow up to 85 percent of your equity – i. e. most would not allow a combined loan-to-value of more than 85 percent.
Therefore if you own a house whose value is $250,000 and the mortgage you owe is $150,000, then your equity is $100,000. This means that if you own a home with a fair market value of $100,000 then you may be able to borrow up to $85,000 for example via a home equity loan or line of credit. Having considerable equity in your home increases your likelihood of getting the loans even if you have a poor credit score.
Reduce other accounts that have revolving credit When calculating your credit utilization ratio, lenders prefer the total of any outstanding revolving debt to be less than 30% of your available credit. Reduce this ratio by paying off credit card balances and lowering the credit limits on the accounts. Less credit usage conveys improved credit handling and plays well with a bad credit rating. Also, continue paying all other monthly installments of the debt in full and on time going forward. Even, a new late payment as recent as the next day can lead to a denial.
Gather no-credit-score proof options Even though home equity lenders rely on credit scores and reports when approving loans, most of them also consider the “no credit score” paperwork too. This includes copies of checks that you have paid on time for utilities, rent, insurance, credit mobile phone bills among others, getting 12+ months of on time payment records for such bills and be ready to demonstrate to lenders that, apart form credit cards and loans, you can meet other monthly obligations as well.
In the case, take a look at a secured home equity loan. One bad credit home equity option that increases the chances of approval if you own your home without any mortgage is a secured loan backed by a portion of home equity. Fixed interest rates with higher loan amount and flexible underwriting criteria are offered in return for a fixed percentage of equity as a guarantee on the loan. It is also important to continue making payments on time to avoid default and possible foreclosure. Equity is different from unsecured loans because it shields the lender from loss in the event of default.
Study the market in search of lenders who are willing to take a blind eye to credit flaws Although most large banks and credit unions use credit scores and reports to determine who is eligible for a loan, some more specialized types of lenders are more lenient. Online lenders, credit unions that have less stringent net worth demands for membership, regional banks, and peer-to-peer lenders as well as specialized bad credit lenders may consider the borrower’s complete financial situation rather than focusing on credit scores or credit reports. They offset credit shortcomings with such aspects as amount of home equity, debt-to-income ratio, and cash reserves, or valuable assets. Therefore, it is advisable to approach the lenders that will approve your application rather than the large national banks that only accept near perfect credit borrowers.
Bring W-2s, tax returns, bank/brokerage statements However, conventional home equity loan or line of credit providers expect you to afford to undergo through tax returns, proof of employment, bank account statements and investment account details despite your bad credit score. When you provide the documentations that show that you have a reliable work history, that you make income deposits consistently each month and also show proof of cash savings and liquid assets, it reduces the credit risk in the eyes of the lenders and you stand a better chance of getting a yes from them. The only issue that needs to be avoided is having too much paperwork to process before beginning to fill out the applications.
Make down payments to lower the amount of money that you need to borrow. If you have readily available cash from an inheritance, sale of other property, lottery win or any other source – paying 10-20% of the needed funds upfront can assist in getting approval for home equity loan or atleast a HELOC with bad credit . The larger down payment assists to overcome any reluctance that lenders may have in financing large amounts to individuals with poor credit scores. Likewise, agreeing to borrow a lesser sum than the amount you desire also contributes to positive outcomes. After that, you can pay the interest first before withdrawing any cash to complete home improvement activities based on funds available as time progresses.
If you are not eligible then you can bring a cosigner on board or can add a borrower who has a better credit score. This is also a very effective approach of dealing with low credit scores by asking a family member with good credit score to act as a guarantor when applying for home equity loan or line. Some of the loan providers will let you include an additional applicant to the loan application form also. Maybe your spouse or children have no credit issues and, therefore, their credit standing can offset any high risk observed in yours alone by the lender. Two incomes are also better than one. Just make sure that any cosigners or joint applicants understand that they equally bear the burden of repaying the loan before adding them.
If the application is denied, then the applicant should repair the credit score and reapply. However, if you apply for a home equity loan, or HELOC with bad credit and you get rejected, do not worry. It will take 6-12 months to enhance credit and debt status and then you can follow the above steps to apply for the loans with the same or other lenders who will be more willing to approve your application the second time around. Performing even some of the actions listed above can lead to significantly better loan decision chances, as a rule, within a year’s time.
Don't Lose Hope The happy news is that it remains possible to find a loan if you are a bad credit – you simply have to do more research, look at the right lenders, and take steps to mitigate the risk that comes with a bad credit score. If one owns a home with certain amount of equity but has some bad credit issues in the past, one should familiarize oneself with the bad credit home equity lending rules so as to be in the best position to maximize on the equity of the home in case of need for funding. And in the long run, constant credit repair efforts will lead to better and cheaper loan programs and rates as well. Therefore, collaborate with professionals, sort your financial matters, and persevere increasingly and patiently during the whole process. Do not think that it is impossible to get Home Equity and use it when you have bad credit score if you try hard and strive to improve your financial habits in the future. The benefit of accessing equity to enhance your living standards or repay a debt can be transformational.
