Bad Credit? You Could Still Get A Home Equity Loan

Single family house on pile of money.
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A home equity loan is money you take out against the value of your home to use as you wish. Most people borrow against their home for renovations or to put their children through college, but the loan can really be used for anything you want.

See: With Home Equity at Record Levels, Is It Time To Tap Into It?
Find: 6 Reasons to Tap Into Your Home Equity

Typically, home equity loans are difficult to get if you have bad credit. This could mean a score of anywhere from 620 and 580 or below. 

Depending on how bad your credit is, it can be difficult to find a lender who will give you a loan. That said, there are certain things you can do to boost your chances of getting approved.

Choose a Lender that Will Work With You

There are certain lenders who work with borrowers who have bad credit scores. This will be the first stop if you are worried about getting approved. Smaller, local banks and credit unions are a good place to shop around for interest rates and quotes if you are concerned about bad credit. Smaller banks often have more flexibility when it comes to underwriting, and might not be as stringent as larger banks.

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Online lenders, which don’t have to worry about the expenses of brick and mortar banks, also have a little more leeway when it comes to giving out loans. These can include lenders like Rocket Mortgage and Lending Tree, who can transfer their savings on expenses down to their customers in the form of riskier loans.

Reduce Your Debt to Income Ratio

You can also make yourself the most desirable candidate possible.  Your debt to income ratio is an important determining factor banks look at when approving loans. This figure is a measurement of how much of your monthly income is utilized to pay your debts each month. For example, if you make $10,000 per month and have $4,500 of debt payments each month, your DTI is 45%. Lenders prefer to see a DTI of 45% or less, though some may accept up to 50% in some cases, according to Forbes. If you have bad credit, you’ll benefit from having as low of a DTI as possible to qualify for a home equity loan.

Discover: 5 Best and Worst Ways to Leverage Your Home Equity

Check How Much Equity You Have

It’s also important to make sure you have enough home equity to take out a loan in the first place. The first step in doing this is getting the home appraised, which typically costs around a couple of hundred dollars. This will give you a ratio of the home’s current appraised value versus your current mortgage. Each lender has their own ratio they prefer to see, and they can advise of this when you meet with them to discuss the equity loan.

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Understand the Product

It’s important to remember that home equity loans can be very risky if not approached at the right time and with the right assets. You are taking a loan out against your home, which means if you cannot pay it back, you could risk losing your home. Many people utilize these loans to pay off higher-interest debt, which could be a good strategy, but others often use these loans recklessly to do renovations or receive cash that, in reality, they cannot afford. This is why it is crucial to make sure your finances are in order BEFORE you apply for a home equity loan.

See: How to Get a Discover Home Equity Loan
Find: HELOC vs. Home Equity Loan: Which Is Better?

A home equity loan is not the vehicle by which to fix your finances, but rather improve upon an already stable financial picture. Bad credit is not the end of the world, but there is a difference between bad credit because of circumstance and bad credit because of behavior, and it’s up to the consumer to discern where they fall and if they can truly afford another loan.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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