Can You Get A Home Equity Loan With Bad Credit?

A bad credit score can significantly affect your borrowing abilities, particularly when you’re looking for a home equity loan. As you know, a home equity loan can help you make a lump sum cash withdrawal.

While refinancing your home equity loan happens to be a viable option in these circumstances, you have other options to go for as well. Click on this link to explore such refinancing options.

In this post, our experts have come up with a comprehensive guide that will give you several options to get a home equity loan if you have bad credit.

Poor Credit Score Worrying You? This Is How You Can Qualify For A Home Equity Loan

The best way to overcome this hindrance is to shop around and look for options. You need to explore multiple lenders and check out their qualifying criteria.

After all, not every lender would have stringent standards, and some would be lenient in this regard. Before proceeding further, let’s take a look at the common requirements to obtain home equity:

  • 15% to 20% of home equity at least
  • Credit score should be at least 620
  • The DTI should be 43% or lower
  • A record of on-time payments
  • Stable employment for income

Steps To Obtain A Home Equity Loan With Bad Credit

Here are some recommended methods that might help you obtain a home equity loan with bad credit:

Make Timely Payments Of Your Bills:

Remember, your payment record accounts for as much as 35 percent of your credit score. So make sure to pay all your bills and EMIs on time without missing the deadlines.

Pay Your Debts:

Most lenders prefer homeowners with credit usage of less than 30 percent. Therefore, you must pay off some debts, which indicates that you won’t be using more than 30 percent of your available limit.

Focus On Credit Card Age:

Your credit card’s age impacts around 15 percent of the credit score. Therefore, do not close any account even when you have paid the dues.

Do Not Apply For New Credit Cards:

Applying for new credit cards results in hard inquiries for credit. This might hurt your credit score.

Check Out Your Debt-To-Income Ratio:

High-profile creditors will check your DTI (debt-to-income ratio) before sanctioning you a home equity loan. This figure indicates the proportion of your monthly income that you need to shell out to pay off your debts.

Most lenders prefer borrowers with a DTI of 43 percent or less. With a low DTI, you have more chances of getting approved for loans.

This is especially true for people with lower credit scores who threaten the lender. A low DTI may aid you significantly in these situations.

Find Out Your Existing Home Equity

Your chances of getting qualified for a home equity loan largely depend on your loan-to-value ratio and the amount of equity you have in your home.

You need an appraisal to know the existing home equity. This is actually a professional assessment of your home’s value.

When finalizing this figure, you must know your loan-to-value ratio. You can obtain this by dividing the current mortgage loan balance (outstanding) by the value of your home.

Most creditors will permit the borrowers if they have 85 percent as their combined LTV. This implies that the value of your new home equity and the existing loan would not exceed 85 percent of your new property’s value.

Get A Cosigner

If you have a poor credit score, it makes sense to co-sign the deal with a friend or family member who has an excellent credit score.

Keep in mind that the other person should know what this indicates for their finances. Ideally, you shouldn’t need them to make the payments.

Legally, they share the same responsibility as you to pay off the loan. Besides, failure to pay the loan on your part might hurt the co-signer’s credit score.

Find The Best Rates By Shopping Around

A poor credit score means that you need to shell out a higher interest rate. Therefore, it is logical to shop around and compare the best options before finalizing your decision.

Explore at least five lenders for home equity loans and compare the fees, closing costs, rates, etc.

Feel free to consult with a reputed mortgage specialist. These experts can guide you with the best rates when seeking a home equity loan.

What Alternative Paths Do You Have To Obtain A Home Equity Loan?

Here are two other viable options you can tap to get a home equity loan with a poor credit score.

  • Cash-Out Refinance

Some homeowners go for cash-out refinance, which involves taking the primary mortgage and then reworking it with a new creditor or the current one.

For a part of your new loan, you can consider a portion of your equity. Remember–this is not the same as a second mortgage. This implies that the lenders give more freedom while underwriting this type of loan.

However, you would require a significant part of equity so that this option works.

  • Personal Loans

The requirements to qualify for personal loans vary, just like for home equity loans. Although most lenders prefer borrowers with a good credit score, other lenders would approve the same even if the score isn’t that impressive.

However, you have a shorter repayment period for personal loans and need to close within seven years. This means you need to shell out higher monthly payments.

Endnote

No property owner would like a poor credit score to mess up their borrowing abilities. However, if you have a bad credit score, repaying your home equity loan can help you improve.

You need to make the payments on time to improve your credit score and payment record. You would find it easy to get approved for other categories of loans down the line. At the same time, you would benefit from the lower interest rates too.

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