Getting a home equity loan with bad credit
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Home equity loans can help unlock extra value in your home. By borrowing money on your property, you can finance home repairs and renovations, which can increase its value. You can also use this money to deal with financial emergencies or even to pay off your debts.
It’s because Home equity loans and home equity lines of credit – the two most common forms of home borrowing – tend to have much lower interest rates than debt unsecured by real estate, such as credit cards.
“Using a relatively low interest rate loan, especially if it’s to cover the cost of a renovation or major home improvement, could be a smart financial decision,” Elliot Pepper, CPA told us. , CFP and co-founder of Northbrook Financial.
But being an owner is not the only requirement for borrowing against real estate.
First of all, you must have what the name of these loans implies: home equity. You borrow against the value of the interest you hold in your property – that is, the equity in your home – so you owe less on your mortgage than the value of the home. If your home is valued at $ 300,000 and you owe $ 100,000 on the mortgage, you have $ 200,000 in home equity.
The more equity you have in your home, the more money you’ll be able to borrow, all other factors being equal – up to one. maximum of 85%. This amount is determined by factors such as your income and solvency, as well as the value of the property.
Second, that creditworthiness – expressed in your credit score – and your income must be sufficient for a lender to decide that you can borrow money responsibly. The minimum credit score 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 score plays a role in getting a home equity loan
You need to familiarize yourself with the credit score ranges in order to see where you are at:
Credit score ranges
|Credit score||Credit rating|
Below 720, you’ll likely still qualify 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 score drops below that threshold, things start to look a bit more blurry.
Can You Get A Home Equity Loan With Bad Credit? And, should you?
What to do if you have bad credit
“If you are planning on getting a home equity loan and have at least 15-20% equity required, but have bad credit, you need to take steps to improve your credit score first.” says Lindsay Martinez, owner and 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 there aren’t any inaccuracies that could negatively affect your score. If there are any, she suggests taking immediate steps to dispute them with the credit bureau and correct them. (A credit report is not a credit score; they are different things, although the former influences the latter, which is available for free in many online credit card accounts.)
“Sometimes things that you rectified have not yet fallen on your report, so it can impact your score,” Tracy says. You can get a free copy of your reports from each of the three agencies, once a year, on annualcreditreport.com.
It’s also a good idea to take a look at your budget and spending habits.
Failure to pay off your credit card balance in full each month will increase your credit utilization rate, which in turn will lower your score. Getting to the root of the problem can help narrow down the steps you might want to take to correct it.
Martinez also advises against requesting additional credit, as each request will result in a temporary impact of a few points on your score, or missing debt payments. Missing bill payments will also negatively impact your credit.
“Having a steady job for many years and / or a high income can improve your chances” of getting approved for a home equity loan with low credit, says Martinez. High income can also improve your debt ratio, which most lenders like to see below 43%, she says.
If you want to continue, Tracy recommends checking with your current lender to see if they would be willing to work with you. Having a mortgage that you already pay off on time may suggest to the bank that you are a trusted borrower.
Whatever you choose to do, there’s one thing experts strongly advise against: using home equity to fund personal expenses, like a vacation or a new luxury car.
Borrowing against your residence means placing it as security; if you stop paying the lender, that residence can be foreclosed. Taking this risk to finance personal expenses is not a wise financial decision.
At the end of the line
Getting a home equity loan with bad credit is difficult, but not impossible. A low debt-to-income ratio and a strong work history can help offset a low credit rating in the eyes of a potential lender.
But what you want to ask yourself is if you need this loan now. Credit scores aren’t fixed, so the best course of action might be to reassess your spending habits and wait until you can increase your credit score. This will not only help you get the loan but also a much better rate of interest.