A home equity loan offers affordable financing options for various purposes such as business start-up, car repair, and living room renovation. However, getting a home equity loan can be challenging if you have a bad credit. Additionally, the most widely used credit scoring model in the US, a score between 580 and 669 is deemed fair, while a score below 580 is considered poor.
Additionally, a credit score of less than 670 will be referred to as bad credit for this guide. It may be difficult, but not impossible, to get a home equity loan if you have bad credit. In this article, we will show various ways based on how you can get a home equity loan with bad credit if you continue to read.
Can I Get a Home Equity Loan with Bad Credit
Even with bad credit, you may still be eligible for a home equity loan if you meet other requirements, such as having a stable income and a low debt-to-income ratio (DTI). Although more forgiving lenders might accept a credit score as low as 620, the majority of them still require a minimum score of at least 680.
This implies that you probably won’t be approved for a home equity loan if your credit score is in the poor range (less than 580). Generally, the bigger the loan amount you might be eligible for, the higher your credit score. If you think you could have better credit, think about doing so before applying.
How to Get a Home Equity Loan with Bad Credit
Before you get a home equity loan with bad credit, keep in mind that obtaining the best rate requires more than just securing the funding. Additionally, it also requires figuring out how to improve your credit score. Here are a few actions to do:
Check your credit report
Even though you can still obtain a home equity loan with bad credit, it’s advisable to take all the necessary steps to raise your score before applying (more on that later). A higher credit score enables you to get a better rate. It may also allow you to obtain a larger loan, subject to your equity’s allowable maximum. To check your credit score, go to AnnualCreditReport.com and immediately contact Equifax, Experian, or TransUnion to correct any errors, such as incorrect contact information.
Determine your equity level
To be eligible for a home equity loan, lenders mandate at least 15% or 20% equity in the property. In addition, the amount you can take out is determined by the total loan-to-value (CLTV) ratio, the appraised value of your home, and your equity. Take the value of your house and deduct the remaining mortgage balance to get an approximate idea of your home’s equity. Real estate listing portals and brokerages provide estimates of home value, but lenders only consider the official appraised value when determining borrowing limits.
Find out your DTI ratio
Lenders use the debt-to-income ratio (DTI ratio) to assess if you can afford to take on additional debt. Just divide your monthly debt payments by your gross monthly income to find your DTI ratio. Let’s take an example where your monthly income is $6,000 and you have two monthly payments: a $2,200 mortgage and a $110 student loan.
Consider a co-signer
A co-signer with better credit can help with lower credit scores for home equity loans. However, the primary borrower must have the minimum required credit score based on bank underwriting guidelines. A co-signer is responsible for repaying the loan, even if not making payments.
Try a lender you are familiar with
As an existing customer, your bank, credit union, or mortgage lender may provide flexibility or assistance with your application. An applicant can present their case to an underwriter in the most effective manner if they have a loan officer who is familiar with the specifics of their circumstance.
Write a letter to the lender
Write a letter of explanation explaining why your credit score is low, particularly if it has recently dropped. The letter should provide an objective explanation of credit issues, avoiding catastrophizing, and include relevant paperwork, such as bankruptcy documents. If your credit score was impacted by late payments due to job loss, but you are now employed, your lender can consider this context.
Requirements for Home Equity Loans
Generally, not all home equity lenders have the same requirements for borrowers. However, there are general rules to follow. Additionally, applicants for home equity loans often need to meet the following criteria:
- A credit score of at least 620.
- A minimum of 15% to 20% equity in your house.
- A maximum debt-to-income (DTI) ratio of 43%, with certain exceptions where the ratio may reach 50%.
- History of on-time mortgage payments.
- Steady work and income.
You’ll need to look up the requirements online or get in touch with a loan officer to find out what’s required to apply for a home equity loan with a particular lender. Furthermore, get a no-credit-check prequalification if you’re not ready to apply for the loan just yet to avoid having your credit score impacted by the loan inquiry.
Final Thought
Although it’s not easy, getting a home equity loan with bad credit is challenging. Recall that credit score is not the only factor considered by lenders. The equity in your house, your income, and other elements are also important. However, you must exercise diligence, consider all of your options, and try to raise your credit score. This entails settling credit report errors, reducing credit card balances, and making on-time bill payments. By being proactive now, you may have more opportunities later on.