Getting a home equity loan with bad credit

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Loans secured by real estate can help you unlock added value in your home… By borrowing money on your property, you can finance home renovations and renovations, which will increase its value. You can also use the money to cope with financial difficulties or even pay off debts.

It’s because home-secured loans and lines of credit secured by home equity – the two most common forms of home borrowing – typically have much lower interest rates than unsecured debt, such as credit cards.

“Using a loan at a relatively low interest rate, especially if it is designed to cover capital improvements or home renovations, can be a smart financial move,” Elliot Pepper, CPA, CFP and co-founder of Northbrook Financial told us.

But being a homeowner is not the only prerequisite for obtaining a real estate loan.

First, you need to have what the name of these loans implies: equity. You take out a loan for your share of your property, that is, your home equity, so you need less on the mortgage than the house is worth. If your home is valued at $ 300,000 and you owe $ 100,000 on a mortgage, you have $ 200,000 of home equity.

The more capital you have in your home, the more money you can borrow, all other things being equal – up to maximum 85%… This amount is determined by factors such as your income and creditworthinessas well as the value of the property.

Second, your creditworthiness, as measured by your credit rating, and your income must be sufficient for the lender to decide that you can borrow money responsibly. The minimum credit rating required to apply for a home equity loan is 620 for most lenders; you will see the best interest rates above 720.

How your credit rating plays a role in obtaining a home equity loan

You should familiarize yourself with the credit rating ranges so you can see where you are:

Credit rating ranges

Credit rating Credit rating
300-579 Very poor
580-669 Fair
670-739 Okay
740-799 Very good
800-850 Exceptional
A source: Experian

In less than 720 years, you will probably still be eligible for a home equity loan or be able to refinance an existing one, says Travis Tracy, Certified Financial Planner at Fortitude Financial Planning. But once your credit rating is below that threshold, things start to look a little darker.

Can I get a home equity loan if I have a bad credit history? Should you?

What to do if you have bad credit

“If you are considering getting a home equity loan and have the required capital of at least 15 to 20%, but you have a bad credit history, you should first take steps to improve your credit rating,” says Lindsay Martinez, owner and specialist Financial Planner at Xennial. Planning.

She recommends downloading your credit reports from each of the three major agencies – Equifax, Transunion, and Experian – and making sure they are free of inaccuracies that could negatively impact your score. If so, she suggests taking steps immediately to challenge them with the lending agency and correct them. (A credit report is not a credit rating; they are different things, although the former affects the latter, which can be viewed for free on many online credit card accounts.)

“Sometimes the things you fixed haven’t made it into your report yet, so it can affect your assessment,” says Tracy. You can receive free copies of your reports from each of the three agencies once a year, at Annualcreditreport.com

It’s also a good idea to take a look at your budget and your spending habits.

Failure to pay your credit card balance in full each month will increase your loan utilization rate, which will lower your score. Tackling the root of the problem can help narrow down the steps you might want to take to fix the problem.

Martinez also advises against applying for an additional loan, as each application will result in a temporary decrease in your score by a few points or missing out on any debt payments. Failure to pay bills will also negatively affect your credit history.

“Having a stable job over the years and / or a high income can improve your chances of getting approved for a low credit home equity loan,” Martinez says. High income can also improve the debt-to-income ratio, which most lenders prefer to see below 43%, she said.

If you would like to proceed, Tracy recommends consulting with your current lender to see if they are willing to work with you. Having a mortgage loan that you pay on time can be a sign to the bank that you are a trustworthy borrower.

Regardless of what you decide to pursue, there is one thing that experts strongly advise against: using your home equity to fund personal expenses like a vacation or a fancy new car.

To borrow against your own home means to put it in mortgage; if you stop paying the lender, the place of residence may be arrested. Taking this risk to fund your personal expenses is not a smart financial decision.

Bottom line

Getting a home equity loan with a bad credit history is difficult, but possible. A low debt-to-income ratio and solid work experience can help offset a low credit rating in the eyes of a potential lender.

But you want to ask yourself if you need this loan. now… Credit scores are not fixed, so the best way to continue is to reevaluate your spending habits and wait until you can improve your credit score. This will help you not only get a loan, but also get it at a much more favorable interest rate.

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