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Can You Get a Home Equity Loan With Bad Credit?

by on Aug 10, 2020, 11:04 AM

Can You Get a Home Equity Loan With Bad Credit?

A home equity loan is a secured loan where your house acts as collateral. People often use equity loans to make major (that is, expensive) improvements to their homes. The amount you can get as an equity loan is based on the difference between the mortgage balance due and the current market value of the home. With home equity loans, you are borrowing against the equity in your house — how much you paid on your mortgage and the home’s current value. As of June 2020, the average home equity loan rate is 5.26%. The rate may rise or fall depending on market conditions. If you want such a loan but don’t have great credit, is it possible to get a home equity loan with bad credit?

A Home Equity Loan With Bad Credit

It’s possible to get a home equity loan even if you have bad credit. Different lenders have different standards for their home equity loans, each of them with different terms. Most banks are willing to approve home equity loans as long as you have 15% equity in your home, a stable income and employment, a debt-to-income ratio of 43 or less, and fair credit. 

The basic requirements of home equity include:

  • A credit score of at least 620
  • A maximum debt-to-income ratio of 43
  • 15% to 20% equity in your home
  • A history of paying your bills on time
  • A stable income and employment

Even with bad credit, you still might be able to get a home equity loan. These tips may help. 

Check Your Credit Report

Potential lenders use your credit report to evaluate their risk of extending credit to you. Taking a look at your credit report helps you identify errors or problems. You can work on them before applying for your loan. 

1. Ensure You Have Enough Equity

Before applying for an equity loan, make sure you have 15% to 20% equity in your home. Having lots of equity will help you get good rates. You can determine your equity by calculating your loan-to-value ratio. 

2. How Much Do You Need?

Before borrowing money, you must know how much you really need. Resist the temptation to borrow more than you need. Going too high reduces your chances of getting the loan. Being eligible for a large loan does not always mean that you need to borrow that whole amount. A larger loan increases the amount you have to pay in interest. 

3. Use a Co-Signer

If your credit is so low that you cannot get a loan, consider seeking the help of a co-signer. They apply for the loan with you and are equally responsible for the loan. Even though your co-signer may not intend to repay the loan, they are responsible for it on paper. Their credit will suffer if you fail to pay the loan.

4. Boost Your Credit First

If your credit is sketchy, consider boosting it before applying for a home equity loan. Some of the most-effective ways to do that include:

  • Avoid maxing out existing credit cards or opening new ones.
  • Correct errors on your credit report. 
  • Pay down your credit card debt and stay below the 30% utilization rate.
  • Pay your bills on time every month. 
  • Avoid closing down or canceling your credit cards after you pay them off.

The process of improving your credit may take some time. It may not be a good idea if you need a loan fast. 

Are Equity Loans a Good Idea?

Equity loans are a great idea because they are secured: Your home acts as collateral so you don’t have to worry about it. You are likely to get better terms than with regular loans. Depending on your specific situation, you might also save lots of money on taxes. 

The interest rates are lower than regular loans that have no collateral. Low interest means you won’t spend a lot of money in loan repayment.

However, equity loans have one big challenge: If things don’t go according to plan, the risk could cost you your home. 

If you suddenly find yourself in a difficult financial situation, your home equity loan may help you stay afloat. It is a great move if you are in a temporary financial crisis or have a backup plan. 

Home Equity Loan vs. HELOC

Another option might be a Home Equity Line of Credit (HELOC). Home equity loans are different from HELOC loans. Home equity loans are fixed loans that are offered based on your equity in your home —  they come in a fixed term with fixed interest payments. On the other hand, a HELOC works like a credit card — it lets a borrower take money against the line and make payments throughout the loan term. HELOC loans are secured by your equity in your home. 

Can I Use a Home Equity Loan to Buy Another House?

Coming up with enough money for a down payment can be difficult, but having a home can make things easier. You can use your home equity loan to buy another house or property. When trying to buy a new property, leverage equity in your existing home to save money. You are likely to pay less if you secure a second lien on an existing home. Doing that is a lot better than having to take out an actual additional mortgage. 

You can get a home equity loan even with bad credit, and you can do a few things to improve your credit before taking out the loan. ScoreMaster can help.

References:

  1. https://www.investopedia.com/terms/h/homeequityloan.asp
  2. https://www.investopedia.com/terms/h/homeequityloan.asp#fixed-rate-loans-vs-home-equity-lines-of-credit-helocs
  3. https://www.investopedia.com/mortgage/heloc/bad-credit/
  4. https://www.thebalance.com/how-to-get-a-home-equity-loan-with-bad-credit-4686014