Online lenders have home equity loans bad credit problem solutions that banks won’t do. So, if the banks have turned you down – keep reading.
Many people are in the same boat. They need cash fast and can’t get through the hassle of a bank loan or credit card application because their credit is bad. The solution? A home equity loan! These loans are meant for homeowners with bad credit.
You can borrow up to 85% of your property’s value without having to jump through any hoops like proving that you have a steady income or assets. This type of home loan is like a personal loan. You get a lump sum of money and then pay it back over time.
One downside, however, is that these loans usually come with higher interest rates than other types of loans. Still, it might be worth it, depending on how much money you’re trying to borrow and how much time you’re willing to wait before getting approved.
Keep reading to learn more about using a home equity loan when you have a bad credit score.
What Is a Home Equity Loan for Bad Credit?
A home equity loan is a type of loan that lets you borrow money against the equity you’ve built up in your home. Equity is the difference between the current value of your home and how much you still owe on your mortgage. In other words, it’s the portion of your home that you actually own.
For example, if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 equity. You can borrow up to 85% of this equity, or $42,500, by taking out a home equity loan.
Many people with bad credit scores struggle to get approved for loans. A home equity loan is one way that lenders work around these limits (bad credit) and make it possible for you, as an individual looking into purchasing your first or next house. However, if you get a bad credit home equity loan, your annual percentage rates (APR) might be higher.
You can use the money you borrow for anything like paying bills. It is most often used for home renovations.
Equity loans are a great way to get more cash when you need it without affecting your regular monthly mortgage payments. You can even use this extra credit line as an opportunity for some financial counseling if required!
The interest rate on home-equity lines is usually lower than other financing options, so there won’t be any surprises with increases in the price each year. However, remember that these funds will only last until the maturity date (the end). This means after all those years have passed and we’re left paying back our original loan amount plus whatever the fees are.
The lender will foreclose on your home if you miss a payment or pay late. If you sell your home while you still owe money on a home equity loan, you must pay back the rest.
How Do I Qualify for A Home Equity Loan If I Have Bad Credit?
All lenders have different terms, considering different standards for home equity loans. There are a few things you can do to increase your chances of being approved for a home equity loan with bad credit:
- You need to have at least 15% or more home equity. You can do this by paying off your mortgage more quickly. However, I realize that paying down the mortgage balance may not be feasible if you want to borrow more money now.
- The loan borrower needs to have a credit score of 620 or higher.
- Many lenders require that someone’s DTC (debt-to-income ratio) be 43% or less for them to qualify for a home equity loan.
- Bill payment history
- There must be a track record of long-term employment and income history.
How To Apply for A Bad Credit Home Equity Loan
If you’re looking to take out a home equity loan with bad credit, you may be wondering where to start. Applying for a home equity loan with bad credit can be a little more complicated than applying for a traditional mortgage loan, but it’s not impossible.
Here are some tips for applying for a home equity loan with bad credit:
1. Check your credit score and credit history
Before applying to a home equity lender with bad credit, it’s essential to check your credit score and report. It may be tempting to skip this step, but doing so could cost you big bucks down the line.
Home equity loans for people with bad credit tend to have higher interest rates than other types of home financing options. If your credit isn’t strong enough to qualify you for the best interest rates, it could cost you a lot in terms of fees and monthly payments.
You can fix any errors or make any corrections to improve your credit before you apply for a home equity loan. However, inaccuracies or outdated information could affect lenders’ decisions to approve your loan.
2. Compare lenders
Not all lenders will approve you for a home equity loan with bad credit, so it’s important to compare your options. Shop around for quotes, and check reviews of various lenders before you settle on one.
3. Evaluate your debt-to-income ratio (DTI ratio)
If you have a high DTI, obtaining a home equity loan can be difficult. When you plan to buy a home or take out a HELOC, lenders will review your DTI to avoid over-extending yourself. The more debt you have concerning your income, the less likely you will be approved for a loan.
To determine your debt-to-income ratio, you would divide the amount of money you spend every month on debt by how much money you make every month.
Let’s assume your monthly income is $6000 and monthly debt is $2500, you can calculate DTI like this:
$2,500 / $6,000 = 41% DTI
You want to make sure your DTI ratio is less than 43%.
4. Make sure you have enough equity
One of the primary things lenders look at when considering a home equity loan is how much equity you have in your home. Generally, you need to have at least 15% to 20% equity in your home to qualify for a loan.
You will need to know your loan-to-value ratio or LTV. This is a comparison of the remaining mortgage principal and the current market value of the home. To calculate it, divide your outstanding mortgage balance by the appraised value of your home.
5. Consider how much you need to borrow
When it comes to a home equity loan, you’ll need to figure out how much additional money you’ll require above your current mortgage amount. Some lenders may want you to take out a loan that’s worth up to 85% of your home’s value. Others may limit you to 60% or 70%.
6. Compare interest rates
Interest rates on home equity loans can vary significantly from one lender to another. However, your interest rate depends on your credit score. A higher credit score will get you a lower interest rate.
It is good to compare rates from several different lenders before choosing one.
7. Use a co-signer if needed
You may need a co-signer to approve a home equity loan if you have bad credit. A co-signer is a person who agrees to repay the loan if you are unable.
If your co-signer has good credit, it will typically improve your chances of being approved for the loan and also get you a low-interest rate.
8. Consider boosting your credit score
If your credit score is low, you may want to consider boosting it before applying for a home equity loan. Improving your score will increase your chances of being approved for a loan and get you a low-interest rate. Here are a few tips to boost your credit score:
- Check your credit report to see any errors, such as lines of credit you didn’t open or other issues, such as overdue payments.
- You should check your credit report to ensure there are no mistakes.
- This can be done by paying down your existing loan or debts and using credit cards responsibly.
- Closing credit cards is never a good idea. Leave them alone or have an automatic payment set up, so you don’t forget! Closing an open line of credit can hurt the utilization ratio and cause dips in scores that lead you into harmful debt patterns.
- Don’t overuse or establish new credit accounts. High credit utilization ratios are undesirable because they suggest that you’re a bad credit user.
- To stay below the advised 30% usage rate, you’ll need to decrease existing credit card debt.
You know that you’re supposed to fix your credit, but it takes so much time and effort. But the rewards are worth all of this work. Even if you can’t use the equity in your home, you could qualify for cash out refis, a revolving line of credit, or other personal loans.
What Credit Score is Needed for a Home Equity Loan?
Getting a home equity loan is an excellent way for people with less than perfect credit to get cash. When you apply for a home equity loan or home equity line of credit (HELOC), your credit score is one of the key factors. It determines how much interest and fees will be charged.
Generally, you’ll need a FICO credit score of at least 620 to qualify for an equity home loan. However, most lenders will approve loans to borrowers with a score as low as 580. The FICO score varies from 300 to 850.
A FICO score of 700 gives you the best shot at a loan with good terms. A score of 620 or below 580 means you’ll get a high-interest loan or be required to pay a higher down payment. Remember that bad credit mortgage lenders charge higher mortgage rates, because their risk of default is higher.
The typical lending requirement for a borrower’s debt-to-income ratio, including any home equity loans, is less than 43% of monthly gross income.
Can I Get a Home Equity Line of Credit (HELOC) With Bad Credit?
You’ll have a more challenging time borrowing money with terrible credit, but getting approved for a HELOC is feasible. You may end up paying more in interest because of your lower credit score.
What Is A HELOC?
A HELOC is a type of loan that lets you borrow some amount of money against the value of your home. Your house serves as the collateral for a home equity line of credit, just as it does with a home equity loan.
You can draw from the line of credit as you need money and repay the funds at any time. There is a draw period set at the start of the loan, which typically lasts 20 years.
Variable interest rates are typical with HELOCs instead of fixed-rate home equity loans. To get the best interest rate on your home equity loan, you need a healthy debt-to-income ratio and an excellent credit score.
Risks Of HELOCs With Bad Credit
Even if you qualify for a home equity line of credit (HELOC) with bad credit, there are risks to consider. It can be more expensive to borrow money this way with the higher rates and fees.
Another risk is that you could lose your home if you can’t make your payments. This is especially true if you use the line of credit to pay off other debts, which is a common practice.
Some experts recommend that you don’t borrow against your house equity at all if you have bad credit. Instead, focus on repairing your credit so you can get a lower interest rate on a traditional home equity loan. Or even a new mortgage loan.
Home Equity Loans vs HELOCs
When it comes to borrowing against your house equity, there are two main types of loans: home equity loans and home equity lines of credit (HELOCs). Both let you borrow money against the value of your home, but they have some key differences.
A home equity loan is a lump sum of money you borrow, which comes with a fixed interest rate and a repayment period. Unlike home equity loans, HELOCs lenders set the amount of money that comes with a variable interest rate, which means your monthly payments could go up if rates rise.
The repayment terms of a home equity loan are about 10-30 years, while the repayment term of the home equity loan is about 10-20 years. In some cases, (HELOC) a balloon payment is requiring full payment of the remaining balance.
Home Equity Loan vs Cash-Out Refinance
Both a home equity loan and a cash-out refinance let you borrow against your home’s value, but they work differently. A home equity loan is the better option if you want to cash out funds completely from your home’s equity fast.
The good news is that, unlike a credit card, you can use a home equity loan to get cash even if your credit score is low. A cash-out refinance works more slowly because you’ll need to wait until the refinance is approved and goes through. However, you can get more if your credit score is high.
Cash-out refinancing comes with low-interest rates. Also, you can use the loan for any personal finance needs. On the other hand, the interest rate of home equity loans is a little bit higher. However, if you have a good credit score, the interest rate will be reasonable.
A cash-out refinance does not add another monthly payment or new mortgage to your list of obligations, as a second mortgage would. You pay off your first mortgage and replace it with the new one.
Cash-out refinances, on the other hand, typically entail extending your repayment period and incurring to pay the closing costs upfront. However, a home equity loan might be a good idea to consider if you need a large sum of cash with poor credit and you’re willing to pay a bit more in interest.
What Is the Minimum Loan Amount for A Home Equity Loan?
Homeowners who need money for home renovations or new builds will find that lenders don’t offer small loans because these transactions aren’t as profitable.
Typically, home equity loans’ minimum loan amounts range from $10,000 – $35,000. The exact amount you can borrow depends on your credit score, the value of your home, and how much you still owe on your existing mortgage.
The good news is that if you can’t get approved for a large enough loan, you can always refinance your home equity with a cash out refi.
Summary: Home Equity Loans Bad Credit Problems Solved
Bad credit equity loans from online lenders have higher interest rates than banks, but banks won’t lend money to people with bad credit. When you searched for “home equity loans bad credit” and came to Jane Loan, it wasn’t by accident. You came to the right place to apply for that money you need.