2024’s Quick Guide to Getting a Home Equity Loan With Bad Credit

Can You Really Get A Home Equity Loan With Bad Credit?

Absolutely, you can! Having a lower credit score doesn't automatically disqualify you from getting a home equity loan. Some lenders are willing to work with FICO scores in the fair range (lower than 600), provided you meet other criteria like debt, equity, and income requirements.

🤔 How bad is a bad credit? When it comes to credit scores, terms like "bad" aren't officially used by credit bureaus. However, for home equity loans, a credit score below 680 is often labeled as "nonprime" or "subprime." Scores in this range may pose challenges when seeking approval for a loan.

To be honest, it won't be a walk in the park. Lenders are often stricter with home equity loans compared to regular mortgages. But don't worry, it's still doable.

Don’t stop here - See how you can be eligible!

Home Equity Loan Eligibility Checklist for Poor Credit

It's important to note that each home equity lender may have different requirements. However, there are some usual expectations for home equity loan applicants, such as:

• Decent Credit Score - You'll usually need around 620, but this can vary.

• Some Equity in Your Home - Most lenders want you to have paid off about 15-20% of your home.

• Your Debt vs. Income - Lenders check this to make sure you're not taking on too much debt.

• On-Time Mortgage Payments - They like to see that you've been keeping up with your mortgage.

• Stable Job and Income - This shows them you have a reliable source of money to pay them back.

11 Ways You Can Get a Home Equity Loan with Low Credit Score

Getting a home equity loan with bad credit isn't rocket science, but it does involve a few extra steps. Here's your roadmap:

1. 1. Check Your Credit Compass

   Start by grabbing a free copy of your credit report and reviewing through it for any errors. Mistakes happen, and they could be dragging your score down. If you find any, dispute them pronto.

2. 2. Equity Exploration

   Figure out how much equity you’ve got tucked away in your home. Lenders typically lend up to 80% of this value, sometimes even more.

3. 3. Calculate Your Debt-to-Income Ratio

   This is how much you owe each month versus how much you earn. Lenders prefer to see this ratio at 43% or less. Keep it low for a better shot at approval.

4. 4. Call in Reinforcements - COSIGNER

   Adding a co-signer could boost your chances of getting approved. Just remember, if you slip up on payments, they’re in the hot seat.

5. 5. Try sticking to a known lender

   Hit up lenders you already know and love. If you’ve got a solid relationship with your mortgage lender, they might be more lenient when it comes to your credit score.

6. 6. Get a Grip on Your Home's Value

   If you're in the dark about your property's value, consider using a home value estimator or consulting with a broker. Be aware, though, that the lender will conduct their own appraisal later, so any preliminary figures should be taken as rough estimates.

7. 7. Know Your Mortgage Inside Out

   Before sealing the deal on your home equity loan, lenders will want to review your latest monthly mortgage statement.

8. 8. Calculate Your Borrowing Power

   Once you've got a handle on your home's value and what you owe, it's time for the magic of a home equity loan calculator. This tool crunches the numbers for you, based on your home's value and the lender's max LTV ratio. It's a smart move to help you decide if moving forward with a full application makes sense.

9. 9. Write letters explaining your bad credit beforehand

   If money's been tight, share your story with the lender. Write a letter explaining what happened and how you'll pay back the loan. And have things like bankruptcy papers or divorce papers handy to prove it.

10. 10. Consider applying with three to five different home equity lenders

    Finding a lender willing to offer a home equity loan with bad credit may require some persistence, as not all lenders extend these opportunities. Simplify your search by utilizing a home equity loan comparison tool, which matches you with lenders suited to your needs and circumstances, saving you valuable time and effort.

11. 11. Cross Your T's and Dot Your I's

    After your home equity loan gets the green light, it's like any other mortgage. The lender double-checks your info, ties up loose ends, and boom, you're set for closing. Once you sign on the dotted line, expect the funds to hit your account after a three-day grace period.

Safety Checks & Red Flags

Home equity loans can be a tempting solution when you need some extra cash, but they're not without their risks. The biggest one? Foreclosure. Since your home acts as collateral, missing payments could put you on the path to losing it.

Don't forget about closing costs and other fees that can sneak up on you. Research is your best friend here - watch out for those warning signs that could signal trouble ahead:

• If a lender's rates seem sky-high compared to others, it's time to hit the brakes. You don't want to be stuck paying way more than you bargained for.

• We've all heard them - promises of easy money and low rates. But if it sounds too good to be true, it probably is. Don't fall for empty promises that could leave you worse off.

• Beware of loans that start small but end with a huge "balloon" payment. It's like signing up for a calm ride only to hit a rough patch down the road.

• Feeling rushed to sign on the dotted line that reads “Sign Here, ASAP”? That's a red flag. Take your time - a hasty decision could lead to regrets later on.

• Watch out for lenders who keep pushing you to refinance. Each time you do, they're pocketing fees and eating into your equity.

• If a lender's asking for money upfront and can't explain why, run the other way. You shouldn't have to pay a mystery fee to get a loan.

Remember this cautionary tale: Imagine Nancy, excited to get a home equity loan for her daughter’s college tuition. She came across a lender with an appealing offer featuring a low interest rate and the best terms possible, but there was a catch - they required a large upfront payment.

Something felt off to Nancy, so she decided to do some researching. She soon found numerous negative reviews and discovered that the lender had a history of scamming borrowers with hidden fees and misleading terms.

So, as you come across different home equity loan lenders, keep your guard up. With a healthy dose of skepticism and a keen eye for red flags, you'll navigate the pitfalls and protect your most valuable asset - your home.

Home Equity Loan Application Denied? Here's Your Plan B

1. Ask for Feedback: Contact the lender and ask why your application was denied. Understanding the reasons can help you fix any issues before applying again.

2. Improve Your Credit: If your credit score was a problem, work on improving it. Make sure to pay your bills on time and reduce any outstanding debt. This can boost your score over time.

3. Build More Equity: If the issue was insufficient equity in your home, focus on increasing your ownership stake. Keep making your mortgage payments to build equity, and consider waiting until you've paid down more of your loan.

4. Give It Time: Improving your credit score or building more equity may take six months to a year. Patience can pay off with better loan terms in the future.

5. Review Other Lenders: If you can't wait, try applying to different lenders. Each one has its own criteria, and you might find one with terms that suit you. Be cautious, though, as more lenient lenders might charge higher interest rates or fees.

Find out how to get the money you need without a home equity loan - Keep Reading!

Alternatives to Home Equity Loans for Low Credit Scores

Didn't get the approval you were hoping for? That’s OKAY! Now, let's look into other options for getting funds if you have a low credit score! Each option offers its own unique benefits and drawbacks, so let's explore them one by one:

1. 1. Home Equity Sharing

Home equity sharing, also known as shared equity financing, allows homeowners to sell a portion of their home equity in exchange for upfront funds. Here's how it works:

With home equity sharing, a third-party investor provides funds to the homeowner in exchange for a share of the future appreciation of the home. The homeowner retains ownership and can use the funds for various purposes, such as debt consolidation, home improvements, or covering expenses.

2. 2. Personal Loans

Personal loans are unsecured loans that borrowers can use for various purposes, including home improvements, debt consolidation, or emergency expenses.

Personal loans are typically available from banks, credit unions, and online lenders. They offer fixed or variable interest rates and a set repayment period.

3. 3. Cash-Out Refinance

Cash-out refinance allows homeowners to refinance their existing mortgage for a higher amount than what is currently owed and receive the difference in cash.

A cash-out refinance is where homeowners replace their current mortgage with a new one that has a higher principal balance. The difference between the new loan amount and the existing mortgage balance is paid out to the homeowner in cash.

4. 4. Reverse Mortgage

Reverse mortgages allow homeowners aged 62 or older to convert a portion of their home equity into cash while retaining ownership of the home.

With a reverse mortgage, homeowners receive funds from the lender either as a lump sum, line of credit, or monthly payments. The loan is repaid when the homeowner sells the home, moves out, or passes away.