The idea of home equity, or the portion of your home that you actually own, is probably familiar to you if you’ve been paying your mortgage on time for at least a few years. Your equity in the property rises as a result of your payments and reduced loan balance over time.
Home equity can be accessed and used for a variety of projects, from home improvements to establishing a college tuition fund, which is one of its biggest advantages. There are several ways to access the equity in your home, but a home equity loan is one of the most common ones.
But if you have poor credit, you might be wondering if it’s even possible to obtain a home equity loan. If you’re interested in learning more about your financing options and what you can do to increase your chances of getting a loan approval, keep reading if this sounds familiar.
Apply for a mortgage today! Apply online for expert recommendations with real interest rates and payments.
A type of second mortgage known as a “home equity loan” enables homeowners to borrow money against the value of their property. A home equity loan might be a good choice if you need extra money. However, if your credit rating has declined since you first bought a house, you might be unsure of your eligibility for this type of financing.
The good news is that some lenders make home equity loans available to people with less-than-perfect credit. However, borrowers should be aware that having bad credit can make getting a loan difficult and result in less favorable loan terms, like higher interest rates.
Financial Requirements For Home Equity Loans
You’ll first need to satisfy a number of financial requirements in order to use a home equity loan to access your equity. These specifications differ between lenders, but generally speaking, the following is necessary for a home equity loan to be approved:
The Pros And Cons Of Getting A Home Equity Loan With Bad Credit
With bad credit, it might be possible to obtain a home equity loan, but should you?
A home equity loan might be an appealing option if you need money for urgent projects like debt consolidation or home improvements. For the best decision, weigh all the potential benefits and drawbacks of this type of financing.
Receiving approval for a home equity loan, even with bad credit, may entitle you to:
Despite all the advantages, be aware that obtaining a home equity loan even with poor credit has some drawbacks, such as:
How To Get A Home Equity Loan With Bad Credit
There are steps you can take if you’ve decided to apply for a home equity loan to increase your chances of loan approval. Let’s look at these steps since doing so might even lead to better loan terms and interest rates.
Check Your Financial Health
Understanding how your financial situation compares to the lender’s qualification requirements is always the first step in obtaining any loan. Meeting credit score, debt-to-income ratio, and home equity requirements are necessary for a home equity loan.
You should check your credit report in the first place to see if you have a credit score that satisfies the requirements. Check for any mistakes and, if you can afford it, think about paying off any debt if your score needs to be raised. This will also help to improve your debt-to-income ratio.
You should also review your credit report and gather information regarding your mortgage. As was previously stated, you must have between 15% and 20% equity in your home to be eligible for a home equity loan. Consider how an additional loan payment, on top of your current expenses, would affect your monthly budget as you review your mortgage information.
Establish Your Desired Loan Amount
Now that you know how good – or good enough – your financial situation is, it’s time to figure out how much money you want to borrow from a home equity loan. Naturally, this starts with figuring out how much money you’ll actually need to spend on the projects you have in mind, but this step also entails looking into the loan-to-value (LTV) limits for your preferred lender.
An LTV ratio shows how much money is borrowed overall in relation to the value of the house. When determining how much you can borrow with this type of loan, it’s important to keep in mind that lenders typically won’t allow the total balance of your current mortgage and your home equity loan to exceed the home’s assessed value.
Additionally, keep in mind that you should only borrow the amount you need because you will be responsible for payments and interest on the entire loan amount whether you use it all for your projects or not.
Get A Co-Signer
Consider asking a dependable friend or relative to co-sign the mortgage if you’re still worried about getting the loan approved or you want to get a better interest rate. But keep in mind that if you do this, you and your co-signer will both be liable financially if you default on the loan.
Since each mortgage lender will have different requirements, loan terms, and interest rates, comparing lenders is always a crucial step in the process. Because of this, it is critical for borrowers to select the best mortgage lender for their unique requirements.
During your search, be sure to take into account both the loan terms and general reputation of each lender. After all, the promise of loan approval may not be worth the risk of working with a less than reputable lender if you find a lender offering home equity loans to borrowers with bad credit scores but also learn about a history of negative customer reviews.
It’s Time To Free Yourself From Credit Card Debt. Apply for a personal loan in just a few simple steps.
There are other options you can think about if you’re not convinced by the advantages of a home equity loan or are concerned about applying for one with poor credit.
Boost Your Credit First
If your planned projects can wait, building your credit score might be a good idea if you’re not in a rush to access your home equity.
Your score can be raised by paying off credit cards, establishing a consistent payment history, and resolving errors on your credit report. When the time comes for you to pursue your home equity loan, this is probably going to lead to better interest rates.
Consider A Home Equity Line Of Credit (HELOC)
Consider a home equity line of credit (HELOC) if you are unsure whether a home equity loan is appropriate for your situation. With a few key differences, a HELOC allows you to use the equity in your home similarly to a home equity loan.
In contrast to a home equity loan, a HELOC works similarly to a credit card in that you are given a credit limit and have the option to borrow money up to that limit over time. The good news is that since you’ll only be responsible for payments and interest on the funds you actually use, this could be a good option if you’re unsure of how much money you’ll need to fund your projects.
However, HELOCs frequently have interest rates higher than those associated with home equity loans, so when comparing home equity loans and HELOCs, be sure to keep all of your financial goals and priorities in mind.
Another financing option you can consider is a personal loan. Different personal loan types, including secured and unsecured ones, may make it simpler for borrowers with poor credit to be approved. However, bear in mind that personal loans have higher interest rates than home equity loans, just like HELOCs.
Explore A Cash-Out Refinance
If you want to avoid making another loan payment, a cash-out refinance might be a better choice. A cash-out refinance gives you the chance to refinance your current mortgage while drawing on your home equity, as opposed to a home equity loan, which is a second mortgage on top of your first. By refinancing the initial loan for a larger loan amount, you can do this and withdraw the difference in cash all at once.
Cash-out refinances offer lower interest rates than home equity loans, though they might be more challenging to qualify for.
The Bottom Line: Bad Credit Can Make Getting A Home Equity Loan More Challenging
The short answer is yes, though some borrowers may find it difficult to be approved for a home equity loan due to poor credit.
However, for some people, the advantages of a home equity loan may outweigh the higher interest rates they’ll have to pay because of their poor credit score. To decide if a home equity loan is appropriate for your situation, just be sure to weigh the advantages and disadvantages of all your available options.
Apply for financing right away to get started on projects such as small-scale home improvements or large-scale remodels if you’re prepared to take advantage of the equity in your home.
Apply for a mortgage today! Apply online for expert recommendations with real interest rates and payments.
A financial writer and data journalist, Katie Ziraldo is committed to producing truthful, understandable, and educating content for upcoming generations of homebuyers. The Detroit Free Press and The Huffington Post are among the publications in her body of work.
Learn About Quicken Loans
FAQ
Can I get a home equity loan with a 500 credit score?
Poor credit is defined as having a credit score of 500 or less, which ranges from 300 to 850. Fortunately, there are home loans for people with 500 credit scores available from the right low credit mortgage lenders. The same is true for borrowers with credit scores under 600 who are looking for a home equity loan.
Does FHA do home equity loans?
Conventional home equity loans, where you can borrow money for any purpose, are not available through the FHA. However, it does provide a number of home equity-backed loan options, including reverse mortgages for seniors, for making improvements to your house.
What is the lowest credit score FHA will accept?
Minimum credit score for FHA loans A minimum credit score of 580 and a 3.5% down payment are required to be approved for an FHA loan. 5 percent. If you can increase your down payment to at least 10%, you can still be approved with a credit score as low as 500.
Can I get a home equity loan with a 540 credit score?
If you can meet other lender requirements despite having bad credit, which is defined as a credit score of less than 579, you might still be eligible for a home equity loan or line of credit. These might include a debt-to-income ratio under 45%, adequate tappable equity, and a combined loan-to-value ratio under 80%.