When you don’t have good credit and need to borrow money, you probably think you’re sunk — but you might be wrong. Despite what you might have heard, there are loans available for people with bad credit and even loans for people with no credit. If you own your home, you might still qualify for a loan with bad credit.
How to Get a Home Equity Loan With Poor Credit
All borrowers, no matter what their credit history, must complete some basic steps to get approved for a loan. But when your credit is poor, there are extra steps you will need to complete to have a chance for a guaranteed home equity loan for bad credit. Here’s what you need to do to get a home equity loan with poor credit:
1. Review and Improve Your Credit Score
“Even a modest improvement in a credit score could save thousands of dollars over the course of a loan,” said Michael Dinich, financial advisor for Your Money Matters. “Borrowers should pull their personal scores from all three bureaus and correct any discrepancies.” Dinich also said that borrowers should be careful with credit repair services, especially those that promise a quick fix for a fee.
2. Choose a Home Equity Loan or a Home Equity Line of Credit
Getting a HELOC and a home equity loan both involve borrowing money against your home. With either of these loans, it’s possible to borrow up to 85 percent of the value of your home — less any outstanding mortgage amounts — even with poor credit. Choose a HELOC if you prefer to access the money via a credit line on an as-needed basis and make payments on the amount borrowed, or pick a home equity loan if you require a large amount of money upfront and can make fixed payments each month.
3. Gather the Necessary Documents to Apply for the Loan
Just like when you secured your mortgage or refinanced an existing mortgage, you’ll need to provide the lender with a host of documents when applying for a home equity loan or HELOC. Start off by locating your most recent tax returns, pay stubs and bank statements to prove your income. Then move on to finding your property survey, proof of insurance, and title policy for the property.
4. Pay for a New Home Appraisal
Before a lender approves a home equity loan with bad credit, it will need to see evidence of how much equity you have in your home, which is done through a home appraisal. Borrowers who do not have a recent home appraisal available will likely have to pay for a new one.
5. Consider a Cosigner
Cosigners provide lenders with additional security because they are liable to pay back the loan if you default on the payments at any time. Although this step is optional, a cosigner can help you get approved if you have a low debt-to-income ratio. A cosigner can also help you get a better interest rate if you qualified for the loan but have a low credit score.
6. Review Offers From Multiple Lenders
Once you apply to a few different companies, you’ll want to compare home equity loan rates. Take a look at the interest rates, closing costs and rate structures to see which one best fits your needs. Ask the lenders any questions you have. It’s crucial that you understand all of the terms of the loan before you sign on the dotted line.
Though lenders might approve home loans for borrowers with poor credit, you might experience some drawbacks to getting bad credit loans. Don’t be surprised if you receive conditional approval on the loan, which is a list of conditions to satisfy before you can close it. A lender’s conditions might include:
- Supplying your tax returns so the underwriter can verify deductions
- Providing letters of explanation for credit inquiries, bankruptcy filings, foreclosures or short sales
- Finding a cosigner who has good credit
You might also have your initial application declined due to your credit score, but sometimes the lender will go back and take a closer look at the reasons behind a poor score. Even with a low score, a lender might still approve the loan if you have a substantial down payment and no late payments within the last year.
Even if you have bad credit, it’s still possible to get a home equity loan. Some lenders are willing to take a risk because the loan will be secured with your home as collateral. All lenders will have a set of criteria you need to meet to be approved, however, and some will offer better rates and terms than others. Shop around and compare offers to get the best deal.
Sarita Harbour contributed to the reporting for this article.