If you have bad credit and are looking to get a home equity loan, there are a few options you can try. Here are some steps you can take to improve your chances of getting approved:
4 Tips to Boost Your Chances of Approval
Check Your Credit Score
It is important to check your credit score before applying for a home equity loan. While there are free sites such as Credit Karma that provide educational credit scores, lenders typically use your FICO credit score to make lending decisions. A FICO score of 680 or higher is generally considered good, but it is still possible to qualify for a home equity loan with bad credit. Because home equity loans are secured by your property, they may be more readily available to those with lower credit scores. However, it is important to note that you may be required to pay a higher interest rate or have other unfavorable terms if you have bad credit. It is also helpful to have strong financial qualifications in addition to collateral to increase your chances of being approved for a home equity loan.
Calculate Your Monthly Debt-to-Income Ratio
When applying for a mortgage, lenders will consider your debt-to-income (DTI) ratio. This ratio reflects the percentage of your monthly gross income that goes towards paying off debt obligations, such as student loans, car loans, and credit card payments. For example, if you earn $6,000 per month before taxes and pay $2,100 per month towards debt, your DTI would be 35%. Most lenders prefer to see a DTI of 43% or lower, although some may be willing to accept a higher ratio in certain situations. However, if you have poor credit, you may need to have a lower DTI in order to qualify for a home equity loan. This is because lenders view borrowers with higher DTIs as higher risks and may be more hesitant to approve them for loans. It is important to carefully review your DTI before applying for a mortgage or home equity loan to ensure that you meet the lender’s requirements.
Check Your Home Equity
When applying for a home equity loan, it is important to have built up sufficient equity in your home, particularly if you have bad credit. To determine your equity, lenders use a loan-to-value (LTV) ratio, which compares your current mortgage balance to the current value of your home. For example, if your home is valued at $300,000 and you still owe $240,000 on your mortgage, your LTV is 80% ($240,000/$300,000). This means you have 20% equity in your home. Generally, lenders require an LTV of 80% or lower in order to grant a home equity loan. To find out the current value of your home, you may need to have it appraised, which can cost a few hundred dollars.
Find a Co-signer
If you have bad credit and are having difficulty getting approved for a home equity loan, one option you may consider is adding a co-signer to your loan application. A co-signer is a person, typically a family member or friend, who has good credit and agrees to be responsible for your loan if you are unable to make payments. While having a co-signer may increase your chances of being approved for a home equity loan, it is important to understand the risks involved. If you miss loan payments, your co-signer’s credit could be affected, and they may become legally responsible for the debt. This can potentially damage your relationship and both of your credit scores. It is important to carefully consider the potential consequences before adding a co-signer to your loan application.
How to Find Lenders Willing to Work With Bad Credit?
If you have bad credit, it may be difficult to find lenders that are willing to offer you a loan. It is important to do your research and get quotes from multiple lenders to find the best deal. Some options to consider include:
- Local banks and credit unions: These institutions may be more flexible in their underwriting standards, especially if you are already a customer. They may also be willing to take on riskier loans in order to compete for business.
- Online lenders: These lenders often have lower overhead costs, which may allow them to offer lower interest rates and fees to their customers. It is also easy to get quotes from online lenders without a hard credit inquiry, allowing you to compare multiple offers quickly.
Keep in mind that if you have bad credit, you may be required to pay a higher interest rate or have other unfavorable terms on your loan. It is important to carefully review the terms of any loan before agreeing to it.
Once Approved, Keep Improving Your Credit
If you are able to obtain a home equity loan despite having bad credit, it is important to continue working on improving your credit score. This will make it easier for you to qualify for loans and other financial products in the future. To get started, you can request a free copy of your credit report from each of the major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
Review your report for any errors or negative marks, and dispute any mistakes with the bureau that is reporting them. It may take several weeks to fix errors on your credit report, so it is important to be proactive in addressing any issues. You should also look for negative marks that can be easily fixed, such as paying off a credit card that is maxed out or resolving a bill that was sent to collections. Taking these steps will help your credit score improve more quickly.
If you are unable to qualify for a home equity loan due to your bad credit, there are alternative financing options to consider. One option is a cash-out refinance, which involves refinancing your current mortgage with a new loan at a higher amount and using the difference to pay off other debts. This option is similar to a home equity loan in that you need to have at least 20% equity in your home and your home serves as collateral for the loan.
However, if you are able to refinance at a lower rate than what you are currently paying, it can be a good deal. Another option is an unsecured personal loan, which allows you to borrow money without collateral. However, you may need to pay a higher interest rate, especially if you have bad credit. You can potentially get a lower rate by securing the loan with an asset, such as a bank account or vehicle. If you are age 62 or older, you may be able to use your home equity through a reverse mortgage.
With this type of loan, you receive a lump sum, monthly payments, or a line of credit, and the interest is added to your loan balance. The loan does not need to be paid back until you move out or pass away, and the home is typically sold to pay off the balance.