How to Get Home Equity Loans with Bad Credit

by Gray Peters

Bad credit puts you in a hole in any lending situation, and it’s tough because no matter how you try to explain away your low Fico score with circumstances and events beyond your control, the hard fact is you didn’t make your payments on time (or maybe at all), and now the credit bureaus are telling lenders to steer clear of you. If you happen to be a home owner, and you need to get some cash out of your house, home equity loans for people with bad credit are going to be nearly your only option.

And I’m sure you can understand why. If you take a step back and look at things from the bank’s perspective, giving you a home equity loan in spite of your bad credit probably doesn’t seem like a very good idea. After all, by taking on this new credit line, you’re not really changing anything about your financial situation except creating another opportunity to increase your monthly debt load and increase the risk of you starting to miss payments again.

That might not always be true. You might be opening the home equity line because you’re going to use it to pay off some credit card debt or medical bills or something along those lines. If that’s the case a lender might look at the situation more favorably because you’ll be getting rid of those brutal interest rates and payments on your cards by transferring the balances over to a lower interest credit line.

Just how much lower that interest rate will be is up in the air. Good credit borrowers might get something near the prime rate on their equity loan, but home equity loans for bad credit could run in the prime+5% ballpark. So, yes, that’s much better than the 20% to 30% you’re going to deal with on credit cards, but it’s not really a low rate loan.

The question is, how can you make yourself look better to the banks. In my mind there are only two ways that’s going to happen.

You could a) wait a couple years while you clear out some debt and watch your credit score improve as you zero out balances and make consistent payments (and maybe even write some dispute letters about blemishes on your score, or b) get someone with shiny undamaged credit to co-sign with you.

That could be a very tricky situation. It’s likely that a nobody will want to co-sign with you unless you’re fairly close, but having someone close put their name by yours on a loan – after what you’ve done to your credit in the past – creates some potential risk to the relationship that you should think long and hard about. If you know – and I mean know that you’re going to make your payments, that your employment is stable, and that everything will work out….getting a co-signer is probably the best option. It might make it so you don’t need home equity loans with bad credit at all – you could get the ‘good credit’ kind instead.

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