It can be frustrating to have the thing you need the most right in front of your nose but not be able to reach out and grab it. This is exactly how it can feel if you have equity in your home but are having trouble getting approved for a home equity loan due to a bad credit score.
Having equity in your home means you could potentially get access to cash right away by taking out a low-interest loan. The cash from the loan then could be used to pay off other big expenses – like college tuition for a family member or other high-interest debt.
How A Home Equity Loan Works
A home equity loan – also referred to as a second mortgage – is a loan that a homeowner takes out by borrowing money from a bank or other financial institution, while putting up as collateral the equity in their home. The lender will usually fund a loan for an amount equal to up to 80% (in most cases) of the equity in the home.
Equity is simply defined as the appraised market value of the home minus the amount owed on any existing mortgages, as follows:
home equity = market value of home – total outstanding balance on mortgage(s)
In the case of this type of loan, the lender minimizes their risk associated with making the loan because they “own” part of the home until the loan is paid off. This means that the lender has the right to a portion of the home’s equity required to pay off the outstanding balance of the loan, should the borrower ever be in default due to lack of payments.
The interest rate for the second mortgage home equity loan is generally going to be a bit higher than the rate for the first mortgage of the same borrower. This is the case because lenders for a second mortgage loan are at a slightly higher risk in the case of loan default. This is due to the fact that, in the case of loan default, the holder of the first mortgage has the right recover the principal balance from the sale of the home after foreclosure. The second mortgage lender gets access to whatever monies are left over after that.
Conditions For Taking Out A Home Equity Loan
It can make sense for you to take out a home equity loan when certain conditions are met, such as:
- You want to borrow less than 80% (or up to 100%, depending upon the lender) of the current value of the equity in the home
- You need to pay for a major expense, such as college tuition or medical payments
- You would like to pay down your high-interest debt, such as credit card debt
- You currently have a source of steady income
- Your existing home mortgage(s) are in good standing and you have been making on-time payments
- You can find a bank to extend you a loan, given your current credit score (see below)
What Are Bad Credit Home Equity Loans?
If you have a less-than-perfect credit score, you may be interested in applying for bad credit home equity loans. It used to be the case that if you had a credit score rated as “poor” (under 600), you would not have been eligible for any type of home equity loan because extending you a loan would have been seen by banks as being too risky.
Fortunately, these days lenders have become more sophisticated in their lending practices. They are able to avoid reducing a potential borrower’s creditworthiness to a single FICO (credit) score. Now, they have statistical methods that take into account such items as:
- The details of your credit report (not just the score itself)
- Your current employment and income status
- Your personal track record with making on-time mortgage payments
- Other factors
Furthermore, in order to get approved, it is helpful to know how to build a list of bad credit equity lenders and how to shop for the right deal.
Benefits Of A Bad Credit Home Equity Loan
There are a number of reasons why you should consider taking out a bad credit home equity loan, including when:
- You need cash to make a lump-sum payment such as a college tuition payment, home improvement-related purchase, or medical payment
- You need cash to pay down high-interest credit cards that are keeping you in the hole financially
- You require access to cash at a lower interest rate than you would be able to get from other sources, such as taking out a payday loan, auto title loan, or personal loan
- You want the opportunity to improve your credit rating through establishing a strong track record of making regular, on-time payments
5 Tips For Applying For A Bad Credit Home Equity Loan
Ready to get started? Here are 5 tips to increase your chances of securing loan approval:
1. Only borrow what you need: When presented with a low-interest rate opportunity to get access to cash to cover important and pressing expenses, it can be very tempting to want to take out the largest-possible loan for which you can qualify. However, taking out more than you need will unnecessarily increase your loan payments. This, in turn, can lead to a higher chance of your defaulting on the loan, and it will also mean you will pay more in loan interest than necessary. Borrow enough, of course, but be conservative in terms of how much you end up borrowing.
2. Determine how much equity you currently have in your home: Calculate your current home equity amount by subtracting your current outstanding mortgage loan principal from the appraised (or at least estimated, for now) fair market value of your home.
3. Run your credit reports: Next, find out your current credit scores. Be sure to run your report with all three of the major reporting agencies, since your score will vary a bit from one to the next.
4. Build a list of bad credit home equity lenders: Put together a list of bad credit home equity lenders. These lenders advertise themselves variously as “bad credit home equity loan lenders,” “poor credit equity lenders,” and “bad credit second mortgage lenders.”
5. Apply to all of the lenders on your list: Be sure to apply for a home equity loan to each and every lender on your list. You will be tempted to stop applying and just to go with the first one that makes you a reasonable offer. But, don’t stop there: follow through until you have compared offers from each of your candidate lenders.
