Home Equity Loans for People with Bad Credit

by Anita Vasquez

It’s often said that your home is your biggest investment and that it represents the largest part of your wealth. If that’s true, why is it so hard to get to the money? In fact the only way to access the ‘wealth’ in your home is to borrow it out through some kind of refinance. If you happen not to have the best credit, the only way you’re getting to that money is through a home equity loan for people with bad credit.

The question is going to be whether you qualify for such a loan. In other words, just how bad is your credit? The nice thing about bad credit home equity loans is your low FICO is less likely to affect you on this application than it would on something like a credit card. At least in this case your home collateralizes the debt, protecting the lender to an extent.

Still, your credit can only be so bad before lenders aren’t going to want to take the chance on you. I’d say if your credit score is below around 600 you’re going to find it very tough to find anyone willing to give one of these lines of credit.

But if you’re not in that situation you have a chance, and there will be two major factors in getting the HELOC you want. Number 1, they’re going to see if you have enough equity to keep your loan to value ratio (LTV) at acceptable levels. These days hardly any bank is going to want to lend past 80% LTV (which means if my home is worth $250,000 I can’t have a total loan balance of more than $200,000 – including my new equity line). And what your home is ‘worth’ can be very fuzzy. I don’t know about most homeowners, but I got a letter from the tax assessor this year saying that my home value has taken a big dive. You’ll have to go through a standard appraisal process, and if the equity line amount you want doesn’t fit inside your appraised value, too bad.

If you do happen to have enough equity in the house, the only other obstacle between you and a home equity loan for bad credit will be your income and your other debts. Stricter lending standards aren’t going to let you go past about 28% on your monthly payments to income ratio. So, take out a calculator and add it all up: your current mortgage payment, your credit card payments, car payment, student loan payments, and any other monthly debt service you might have. Then add the amount of the payment you’ll have if you add a bad credit home equity loan to the mix. If it gets past 28% I’m afraid you’re out of luck.

Home equity lines of credit aren’t something to be taken lightly. You have to ask yourself what you’re going to use the money for. Even if it’s a somewhat worth use, such as updating the house so it will sell more easily, I would advise caution. The home may still not sell, but that monthly payment will come due regardless.