If you are seeking a home equity loan with bad credit can pose challenges, even with ample equity in your property. The pool of brokers and lenders that offer these high risk home equity loans and HELOC for borrowers with low credit scores is limited, so you must be prepared and organized.
Can I Get a Bad Credit Home Equity Loan?
If you have equity in your home and you want to pay off debt or make home improvements, one of your best options is to take out a second mortgage. A home equity loan is a fixed-rate second mortgage that allows you to take some of your equity in cash. Home equity loans can be obtained in 2024 at a rate of 9% or 10% for the most qualified borrowers. What if you have below-average credit? Can you still get an equity loan with a poor credit score? Find out the answer below, and talk to one of our loan advisors if you want to know what the minimum credit score for a home equity loan in 2024.
Getting a Home Equity Loan with Bad Credit
It’s always best to have a good credit score to get the best interest rates for any loan. But if you have bad credit, it still may be possible to get a home equity loan. Many mortgage lenders may approve you for a home equity loan with a credit score as low as 620. However, you will still need to meet or exceed the requirements for the loan for debt-to-income ratio, amount of equity (at least 20% usually), and income. According to RefiGuide, home equity loans for bad credit are available to borrower that can show compensating factors and borrower credibility that can be documented.
Some of the requirements for a bad credit home equity loan are:
• Usually a credit score of 600, but some lenders may offer loans for lower score.
• Bad Credit Equity Loans Available for 500 to 580 credit score if you have more than 20% Equity
• A DTI of no more than 43%, but 50% is possible for some lenders.
• On-time payment of your mortgage for the last year.
• Stable income and employment.
What Are the Benefits Of A Home Equity Loan?
Getting a home equity loan has several benefits and drawback:
• A home equity loan is a fixed-rate, defined term loan. You will know what your payment is every month and for how long. This makes it easier to budget and pay down your debt, which can raise your FICO score.
• You can avoid paying higher interest rates: After the Fed raised rates 11 times since 2022, average credit card rates have soared over 20%. With a 9% or 10% rate, you can save hundreds or thousands in interest with a home equity loan.
• A 2nd mortgages allow you to leave your first mortgage in place. For many homeowners in 2024, they have a lower first mortgage rate than they can get with a refinance. It often makes sense to leave the first mortgage alone and get a home equity loan.
• If you’re using the money for home improvements, the interest you pay could be tax deductible, which can offer a considerable savings at tax time.
• You are taking on additional debt: A home equity loan means you are adding to your debt load. You should make sure that your have a steady job and income before taking on additional debt.
• Your rate could be higher: Having a low credit score may mean having a higher interest rate and payment.
• The loan is backed by your home: If you cannot make your payments, the lender can foreclose on your home.
• Closing costs can average between 2% and 5% of the loan amount. These fees can vary widely by the lender, so shop around for the best closing cost amounts. Keep in mind that some lenders may wrap the closing costs into the loan, and you will pay interest on that amount. This is fine in theory, but you should be aware of how closing costs are paid on any loan you are considering.
Our loan advisors will give you the advantages and disadvantages of various home equity loan options.
How To Apply For a Home Equity Loan With Bad Credit
Before applying, you should determine if you can even qualify. Remember, many lenders will require you to have a minimum credit score of 620. If you want to qualify and possibly get a better rate, here are some tips:
• Check your credit score: You can get a home equity loan in some cases with bad credit, but the process will be harder, and the rate will be higher. You will get a better rate with a higher score. So, check your credit score though Annualcreditreport.com before you apply for home equity loans. You can correct errors on your report and get an idea of your recent credit history. If you make on time payments on all of your accounts for a year, it will probably raise your score.
• Find out your equity level: Most lenders require at least 20% equity to qualify for the loan. To find out your amount of equity, take the current home value and subtract your mortgage amount. The lender will rely on the official appraised value of your home, but you can get an idea of the value through your real estate agent. Suppose your home is worth $420,000 and you need to pay $250,000 on the first mortgage. You have $170,000 in equity, and most lenders let you borrow 80%, so you could potentially get a loan for about $86,000.
• Learn what your DTI is: This measures how much your debt is compared to your income. To determine your debt-to-income ratio, divide your monthly debt by your gross income per month. If you have a $6,000 gross monthly income and $2200 per month debt payments, your DTI is about 38%. This is low enough to qualify for most lenders’ home equity loans.
• Consider a current lender: If you have bad credit and want a home equity loan, you may have luck with applying with a lender you currently work with. A loan professional who is familiar with your financial situation may help to present your case more effectively to the underwriter.
• Get a co-signer: If your credit isn’t good enough to qualify for the loan, getting a co-signer could seal the deal. A co-signer with good income and credit can help someone with a low credit score get a home equity loan. However, your co-signer needs to understand that they will have to pay if you cannot.
Consider a Bad Credit HELOC
Another second mortgage option is a home equity line of credit. It also is possible to get a HELOC with bad credit, in some circumstances. The difference with a bad credit HELOC is it’s a line of credit that you can reuse once you pay it off. A home equity loan gives you a lump sum of cash that you pay interest on once the loan closes. On the other hand, a bad credit HELOC only charges you interest on the money you take out.
Remember that a HELOC has a variable rate and it could be lower initially than the home equity loan rate. However, HELOCs often come with teaser rates that go up considerably after six or 12 months. The rate could go up or down in the coming years, so if you are risk averse, you may not want a bad credit HELOC. People who want predictable payments may prefer a home equity loan. Our loan providers can offer you both HELOC and home equity loan options and review the pluses and minuses with you.
Focal Points on Bad Credit Equity Loans
A home equity loan can be an affordable way to get the cash you need. It’s a second mortgage that is backed by your home. Lenders usually allow you to borrow up to 80% of your home’s value, and the current best rates in 2024 are in the range of 9%. If you have a low credit score, your rate could be higher. The best way to learn if you can qualify and at what rate is to check with one of our loan professionals today. Contact us for any questions or to apply for a home equity loan.
Home Equity Mart streamlines quotes for home equity loans, catering to borrowers with less-than-perfect credit histories and low FICO scores. Our mission is to assist clients in securing the finest home equity loans online, even when faced with credit challenges. Our array of loan programs encompasses fixed-rate home equity loans, variable-rate home equity credit, and interest-only second mortgages. We link you with premier home equity lenders capable of meeting your requirements for secondary home financing. Our commitment is to make your mortgage experience stress-free, ensuring you return to us for future loans.
Home Equity Mart.com is your best source for securing home equity lending online. Our primary focus is home equity lending, as we connect you to the leading mortgage lenders and home equity brokers who service your local region. Home equity lending encompasses the following: home construction, education, home purchasing, and refinancing credit card debt. Get approved while the interest rates are low.
Is a Home Equity Loan Good for Consolidating Debt and Improving Credit Scores?
1. Pay off as much debt as you can for all your revolving credit accounts. Get your balances down 25% of the credit line limit. Reduce the balances on all credit cards. This is a better strategy than carrying high balance where exceeding more than 30% of your available credit limit would indicate you were a higher credit risk profile.
2. Do not play the transfer game of pushing your balances from one card to another. It always catches up to, and you end up with more revolving debt. Consolidate your credit card accounts to one or two cards and close out other high interest accounts. Refinancing an consolidating your credit card balances will noticeably distort the appearance of your credit utilization.
3. Keep your credit card accounts open and active by using your cards at least once every five months, even if it is for a tank of gas. When you receive the bill for a credit card you do not use that often, make sure to pay the bill in full. Do not close accounts without the advice of a knowledgeable mortgage broker, as doing so may negatively impact the balance of the variables weighed by the scoring model in assessing your risk profile and credit score.
Applying for Home Equity Loans and HELOCs with Bad Credit
Our procedure is straightforward: Fill out a brief online request form, and we will promptly link you with 2 to 3 prominent Home Equity Lenders that specialize in bad credit programs. Submit your application now for a complimentary, commitment-free home equity quote, and allow us to assist you in achieving your financial objectives today!