Many people believe that bad credit home equity loans are not possible. It is not surprising that the people who often need loans the most are the ones with bad credit. If you have a low credit score, it is likely you have been turned down for lines of credit before. Whether you need funds for a health emergency, a car repair or fixing a leaking roof, you may be wondering how you can tap the equity in your home to get the money you need.
There actually are more borrowing options for home equity loans with bad credit than you might think. Here are some good options to consider if you have struggled to get a line of credit with a low credit score;
#1 Home Equity Line of Credit for Bad Credit
For people with bad credit who already own a home and have equity, you still may be able to get a home equity line of credit or HELOC. A word of warning: You are putting your home up as collateral for the loan. So if you do not pay, you lose your home. Make certain that you can afford the payments!
Even if you have bad credit, if you are still paying your mortgage on time, some lenders may consider extending you a line of credit in the form of a bad credit HELOC.
To get approved, expect to need a loan to value ratio of 80%. That means you should have at least 20% equity in the property. If you think you do not have that much equity, don’t be too sure: Home prices have been rising steadily since the Great Recession. You could have more equity than you think. If you apply for a HELOC, the lender will probably order an appraisal to get a current value.
For borrowers with bad credit, it will help if you can show good, steady income and employment and a reasonable debt to income ratio.
If you are approved, you will likely need to pay a higher interest rate. The good news here is that you can probably deduct that interest off of your yearly taxes.
The interest rate you pay will be interest only for a five or 10 year period, and then it will go up to include interest and principal. You should plan to pay that loan back before principal payments are due. Yes the interest rate on a bad credit HELOC can go up or down with the market.
A HELOC is essentially a line of credit up to a certain amount, but is backed by your home. You can take out the money as you need it, just like a credit card. A HELOC is often a smart choice for a person who needs a steady source of money for expenses that are drawn out, such as a college education or a long term rehab project.
If you need a lump sum of money at once, you should consider a home equity loan.
#2 Home Equity Loan for Bad Credit
A home equity loan is similar to a HELOC but you get your home’s equity up to a certain amount in a single lump payment. If you have a single, large expense you need to pay now, you might consider a home equity loan, such as a big medical bill.
A home equity loan has a steady interest rate. It will be higher than a HELOC, and higher still if you have bad credit, but it still is a good option for people who have bad credit but access to home equity.
Tips to Get a Bad Credit Home Equity Loan
- Get a copy of your current credit report. See how bad things are. You may find inaccuracies that are hurting your score. If there is anything that is wrong that is hurting your score, you can contact each credit bureau and contest each negative, incorrect item.
- Collect all of your financial data so you can give your lenders proof of good income and employment. It will help if you have a decent savings account and investments that are producing returns. It is very important to show with bad credit that you are financially stable and have been for at least the last 12 months.
- Apply for home equity loans with at least three lenders. You will need to give them copies of your credit report, mortgage information and proof of income. You also may need to show bank statements to show that you have cash in the bank. People with bad credit who own a home with equity can get approved, but the more financial documents you have, the better.
- If you have a foreclosure or short sale on your record, you may need to provide letters of explanation to lenders. There are some homeowners who may have been invested in real estate for income purposes during the recession but lost those properties to foreclosure. If you still are current on your home and have equity, you may be able to convince some lenders through manual underwriting to approve you. But you will need to show once again that you have a high level of current financial stability.
- Carefully consider the terms and rates you are offered from each lender. If you are getting a HELOC, you should look at whether it is fixed or adjustable and for how long, what the rate is, any fees, payment schedule, and when rate can change.
The Bottom Line
If you have bad credit but have equity in your home, you probably can get approved for a home equity loan or HELOC. You will just need to show ample proof that you have steady income and are financially stable. This means showing them plenty of financial supporting documents.
If you are able to produce W-2s, tax returns, bank statements and pay stubs that indicate good, steady employment, it is likely that you can get a home equity loan. Just be ready to shop around. If one lender says no, another may say yes.