It is always good to have a clean credit profile, especially when applying for a loan or a mortgage loan. However, applying for a mortgage loan with bad credit is possible, but several conditions must be met.
Those interested in applying for a home equality loan need to have a lower debt than someone with a good credit profile. Still, they must have a higher income and a homeowner’s guarantee, but this will not exempt them from paying higher rates for each loan installment.
What is a Home Equity Loan for bad credit?
Home Equity Loans are fixed-rate loans that allow you to borrow against the equity in your home. That is, the home equity loan amount equals the house’s total value over and above the money owed on the mortgage.
The home equity loan is paid all at once but with a fixed interest rate for a specified period. Banks usually reject these loans to people with bad credit and, therefore, a bad credit score and credit history. However, some non-traditional lenders offer credit to those with a blemish on their credit profile.
Can I get a Home Equity Loan if I have bad credit?
Most banks and lenders do not offer credit to those with a bad credit profile, but there are unofficial institutions that perform this type of “second mortgage“.
That is because the credit score is negative since the property has been purchased, which would mean that the applicant is not eligible to qualify for financing for an official entity. The institution that lends money for the mortgage guarantee with lousy credit will charge higher interest because of its dubious credit profile.
What alternative do I have if I do not apply for a Home Equality Loan?
If you already have a house but want to move to a new one after applying for a home equality loan, it is best to consider a series of conditions we will explain below. An alternative to not using one of these loans, in case you have a home, is to apply for a personal loan, whose amount will be lower but can be used to remodel your current home and leave it as good as new.
If you want to leave your home, you can make improvements to your current home and then sell it at a reasonable price considering the progress and, with that money, buy a new property. If the cash is insufficient, you can use a personal loan without needing to apply for a home equality loan since the latter is more challenging to pay off.
What are the financial requirements to apply for a Home Equity Loan?
Those who want to apply for a home equity loan must consider several financial aspects and meet specific requirements. Before using, check to see if you are eligible for credit. If you have everything you need, the lender will approve the application.
Before applying for credit, one of the first things to consider is your payment history, credit scores, the type of account you use, and whether you owe money or have paid your bills on time. By having a good credit history, an official financial institution will be able to lend you money. However, if you are turned down for credit at these institutions, you can turn to home equity lenders. These generally require between 620 and 680 credit points.
15% equity in the house
As required by the Federal Trade Commission, the lender must appraise the entire value of the borrower’s home. Once the corresponding amount is available, 85% of the home’s value will be loaned. This point is critical since you must confirm that you have at least 15% of the equity in your property.
Debt-to-income ratio (DTI)
The debt-to-income ratio is the percentage of monthly income used to pay off debts, which cannot exceed 43%. This number may decrease when applying for credit from institutions that lend money to those with a bad credit history. Lenders ask to verify monthly utility bills and payments, credit cards, or lease agreements.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio compares the home’s value and the total loan amount, expressed as a percentage. That is, the sum of your current balance plus the entire home equity loan amount must be, at most, the LTV ratio limits agreed upon by the lender.
Pros and Cons of applying for a Home Equity Loan with bad credit
Suppose you need to decide about applying for a home equity loan because you do not have good credit. In that case, you should take into consideration the disadvantages that could cause you inconveniences at the time of paying the loan. But not everything is wrong, since, as well as it has its cons, it also has its pros.
- Some lenders provide credit to those with a bad credit profile or a low credit score.
- Fixed rate for a determined time.
- Lower interest rates than other types of credit.
- Quick access to the money.
- No restrictions on the use of the loan.
- The interest is tax-deductible if the money is used to remodel the home.
- Higher monthly payments than if you have a good credit profile.
- Higher interest rates for bad credit.
- The final loan amount will be less than what would be obtained with good credit.
- The applicant’s home is used as collateral for the loan.
How to get a Home Equity Loan with bad credit?
If you have bad credit and need to apply for a home equity loan, you will need to follow a series of steps similar to applying for a mortgage. This way, you will find out if you are eligible, and if you meet all the requirements, you will be the beneficiary of the loan.
1. Gather information
First, you should find all the information about your current mortgage, as lenders will ask you for a copy of your most recent monthly mortgage statement. Depending on the status of your mortgage, the lender will make you a final offer so you can decide whether to take it or leave it.
2. Verify the value of your property
It would be best if you learned the value of your home, so you will need to go to a professional who can help you. Real estate agents are the best people to do this type of work. In any case, the lending institution will order an appraisal.
3. Check the amount of the mortgage guarantee
After you find out the current mortgage balance, have the property appraised, and have been given a final offer, it is an excellent idea to check it through a home equity loan calculator. You can find several of these calculators on the internet to determine if the lending agency’s offer is correct or approximate.
This way, you will avoid being scammed, and you will be able to know the amount of your loan. That is done by multiplying the maximum LTV ratio by the value of your home. Then, subtract the outstanding balance of your mortgage from the total of this multiplication. The final result will be the maximum amount of the home equity loan.
4. Explain the reason for your bad credit history
While it is unnecessary, giving reasons why you have not been able to stay current on your debts is a form of politeness and respect for the lender. The best way is to send them a formal letter in which you should explain why you have not been able to pay on time, what financial problems you have had, and how you will repay the home equity loan to the agency they will offer you.
Also, you can attach different documents that support that you have gone through difficult economic times, such as a divorce settlement, job layoff, etc.
5. Check with several lenders
It is always good to seek a second opinion, although a fifth opinion would not hurt in this case. You can find out about different lending institutions and the amounts they can offer you, as well as the rates and fees, among other relevant information that can help you compare and choose the best option.
6. Loan granted
Suppose you have already chosen the lender you will go to and have what the company requests and all the documentation submitted. The next step is verifying all the information written in the application. After confirming that all the information is correct, you can close the loan and sign the contract. Generally, the entities deposit the money after the signing of the agreement. Depending on the financial company, you will have a few days to cancel the loan.
- Bond, Casey. “How To Get A Home Equity Loan With Bad Credit – Forbes Advisor.” Forbes Advisor, Forbes, 31 Jan. 2022, https://www.forbes.com/advisor/home-equity/get-a-home-equity-loan-with-bad-credit/.
- “Home Equity Loan For Bad Credit – TurnedAway.Ca.” Ca, https://www.facebook.com/turnedaway.ca/, https://www.turnedaway.ca/home-equity-loans/.
- Luthi, Ben. “How to Get a Home Equity Loan in 5 Steps.” Sound Dollar: Transform Your Financial Health, Sound Dollar, 7 Sept. 2022, https://www.sounddollar.com/how-to-get-a-home-equity-loan.