Posts tagged: home equity loans for people with bad credit

How to Get Home Equity Loans with Bad Credit

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.


Home Equity Loans for People with Bad Credit


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.