You want to borrow against the equity in your home to pay down existing debt and take care of a few other things, but your credit isn’t good. Now, you still may be able to find a lender that will green light such a loan, but should you even apply for a home equity loan with bad credit?
Here’s what you should know about that – and more.
What is a Home Equity Loan?
It’s a consumer loan that is secured by a second mortgage, permitting the homeowner to borrow against the property’s equity.
Am I Eligible for a Home Equity Loan with Bad Credit?
You may be since lenders have varying eligibility thresholds. Therefore, you should do your homework regarding rates and terms.
For instance, many lenders require you to have between 15 percent to 20 percent equity in your residence as well as a minimum credit score of 621 and a good payment history. Some also cap debt-to-income ratios at between 43 and 50 percent and need to see stable employment and a solid income history.
To answer the question, yes, some lenders will okay your loan request if your credit score is under 621, but those offers will be few and far between. You may want to seek lenders who, as part of the loan application process, don’t specify minimum credit score requirements. Such institutions include Citizens Bank, Flagstar Bank, KeyBank, and more.
What to Do Before Applying for a Bad-Credit Home Equity Loan
Here are some steps you can take when mulling how to get a home equity loan with bad credit:
- Scour your credit report. You want to know what your lenders will be seeing. Look for any errors that, when fixed, can increase your scoring. And if there’s time, you can make other financial moves to boost your numbers, such as paying off a delinquency.
- Check your debt-to-income (DEI) status. As we mentioned, lenders do pay attention to that DEI – your monthly debt obligations divided by your monthly gross income — no matter how much you earn. You want to see what size loan you can afford, and in general, lenders don’t like a high DTI.
- Be certain that your equity is sufficient. If you have a decent amount of equity – at least 15 to 20 percent – you’ll get a commensurate rate. Your loan-to-value ratio is what establishes your equity. To get to such ratio, which is calculated as a percentage, you divide your loan balance by your residence’s current value.
- Apply for the right amount. You can usually borrow up to around 85 percent of your home’s value, but it’s best to borrow only what you need. Borrowing excessively will just make for higher payments and interest.
- Check out interest rates. The rule of thumb is, the lower your credit score, the higher your interest rate. With everything else being equal, if you have a bad credit score, you may pay around $200 more for the same size loan.
So, should you apply for a home equity loan, even if you have bad credit? You can, as you now know. In fact, because your home is considered collateral, such a loan may be easier for you to get than other types of loans. But whether you should do so depends on your financial situation and you long- and short-term needs.
If your credit card or other unsecured debt is keeping you from improving your financial situation, you may want to seek out debt relief, also called debt settlement. We recommend Freedom Debt Relief not only for its effectiveness, but for its experience and credentials as well.
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