To get a home equity loan with bad credit, you’ll need more income, more home equity and less total debt than someone with good credit. You’ll also pay a higher rate than you would if you had better credit, but it may be worth it to pay off high-interest debt or make some home improvements to boost your home’s value. Show
How to qualify for a home equity loan with bad creditThe qualifying requirements for a home equity loan are stricter because it’s considered a “second mortgage,” which means it’s paid after your first mortgage if you default and the lender forecloses on your home. If you’re getting a home equity loan with bad credit, lenders will need to:
6 steps to apply for a home equity loan with bad creditThe process for applying for a home equity loan with bad credit is similar to getting any other type of mortgage, but there are a few extra steps you’ll need to follow. 1. Gather information about your current mortgageHome equity lenders will need a copy of your most current monthly mortgage statement to make a final home equity loan offer. 2. Check your home’s valueIf you’re not sure, ask the real estate agent that helped you buy your home to prepare a comparable market analysis. However, the lender will usually order an appraisal to confirm the value, so don’t count your home equity money just yet. 3. Try a home equity loan calculator before you applyOnce you know your home’s value and your current mortgage balance, try a home equity loan calculator to start your home equity loan search. The calculator does the math for you and gives you a rough idea of whether the full application is worth the effort. Lenders calculate your maximum home equity loan amount by multiplying your home’s value by the max LTV ratio they allow and then subtracting your outstanding mortgage balance to determine your maximum home equity loan amount. 4. Write letters of explanation for your bad credit in advanceIf you’ve had some tough financial times, write a letter to explain what happened and how you’ll be able to repay the home equity loan. Be prepared to provide documentation, such as bankruptcy papers, divorce decrees or anything else related to your financial situation to accompany the explanation letter. 5. Apply with three to five home equity lendersYou may need to shop around more to get a home equity loan with bad credit, as not all lenders offer them. An online home equity loan comparison tool saves you time by allowing you to enter your information and get calls from lenders who compete for bad credit home equity loans. 6. Provide your documents and close your home equity loanOnce your home equity loan is approved, the process is similar to getting a regular mortgage. The lender verifies all the information from your application and once it’s finalized, you’re ready for closing. After you sign your paperwork, you’ll receive the funds from your home equity loan at the end of your right to cancel period, which lasts for three business days. Pros and cons of a home equity loan with bad creditProsInterest may be tax-deductible if used for home improvements Interest rates are lower than personal loan interest rates Funds are disbursed quickly and can be used for any purpose Fixed-rate payments stay the same for the life of the loan ConsInterest rates and the monthly payment will be higher than if you had good credit Lenders could foreclose and you could lose your home if you default You may be limited to a lower maximum loan amount Interest is not tax-deductible if it’s used for debt consolidation What if I want to get a home equity line of credit with bad credit?Another popular second mortgage option for tapping your home’s equity is a home equity line of credit (HELOC). A HELOC works like a credit card for a set time called a “draw period,” during which you can borrow from your credit line. After that time, the balance must be paid off in installments. Common features of HELOCs include:
Pros and cons of a home equity loan vs. a HELOCProsThe interest-only option temporarily keeps the payment lower than a home equity loan Flexibility to charge and pay off the balance as needed during the draw period Payments are only based on the amount used ConsAdjustable mortgage rate could result in a higher payment if rates rise Ongoing maintenance, membership, termination or close-out fees may apply The payment could become unaffordable after the draw period ends and the balance is due Alternatives to home equity loans with bad creditIf you’re not quite sure that a home equity loan meets your financial needs, consider these other home equity-tapping options. Cash-out refinanceConventional or government-backed loan programs allow you to replace your existing mortgage with a larger loan amount and pocket the difference with a cash-out refinance. If current mortgage rates are low or your credit scores are below minimum standards for a home equity loan, a cash-out refi program may be a good alternative. A cash-out refinance typically comes with:
Reverse mortgageIf you’re age 62 or older, you may be eligible for a reverse mortgage to convert equity into income without making a monthly payment. The catch: Your loan grows over time instead of shrinking because the monthly interest is added to your loan balance. Features of a reverse mortgage include:
*Although there is no credit score minimum, lenders will require proof you aren’t delinquent on any federal debt and can pay ongoing property taxes, homeowners insurance and maintenance costs Personal loansA personal loan is unsecured and typically comes with higher rates and a shorter repayment term — and because it’s not secured by your home, there’s no risk of losing your home if you default on a personal loan. What is the minimum credit score for a HELOC?Your credit score is one of the key factors lenders consider when deciding if you qualify for a home equity loan or HELOC. A FICO® Score☉ of at least 680 is typically required to qualify for a home equity loan or HELOC.
What is the monthly payment on a 50000 HELOC?For example, on a $50,000 HELOC with a 5% interest rate, the payment during the draw period is $208. Whereas, during the repayment period the monthly payment can jump to $330 if it is over 20 years.
Does a home equity line hurt your credit?Because it has a minimum monthly payment and a limit, a HELOC can directly affect your credit score since it looks like a credit card to credit agencies. It's important to manage the amount of credit you have since a HELOC typically has a much larger balance than a credit card.
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