Finding Home Equity Loans with Bad Credit
Getting a Home Equity Loan with Bad Credit
When the going gets tough, sometimes, the tough get a home equity loan. There are always going to be times in life when you could use an injection of cash, whether that’s because you’re trying to breathe life into a startup, needing to update your kitchen, or you just got a little behind on bills. A home equity loan can be an excellent weapon in your life improvement war, but if your credit is on the poor side, it can make finding a home equity loan tricky.
Home Equity Loans and Credit Requirements
The good news is that there is hope for securing a home equity loan even if your credit score is low. Bank requirements tend to vary across companies, so if you can’t qualify with the first banker you come across, you may have success with another. Credit is absolutely a factor, but some banks place less emphasis on this than others.
You may find better success with an FHA-backed home equity loan or even one that’s considered subprime. As long as you can afford to make the payments and understand the terms you’re agreeing to, there’s no reason to be afraid of a non-conforming mortgage. Many people get in trouble with them because they fail to read the fine print (so don’t leave your magnifying glass at home).
Compensating Factors for Home Equity Loans
Just like with a purchase loan, home equity loans will consider compensating factors, depending on the program’s underwriting guidelines. Compensating factors are those financial or historical items that show that your credit score may not tell the whole story. The best compensating factors for a home equity loan include:
Home equity. The equity in your home is number one, above anything else. If you come to the bank only owing 40 percent of your home’s value and asking to borrow another 20 percent, the bank will shine favorably on you. However, if you still owe 85 percent and want to get more money out with a bad credit score, you’ll have a harder time.
Debt-to-income ratio. What’s more important than what your credit score is how you use it. Is your debt relatively low in comparison to your income? Your goal is to keep it under 43 percent -- far, far below if possible. The lower your debt to income, the less of a risk you are. When everything’s maxed out and you also have a bad credit score, there’s not much to be done.
Steady income. Although a much smaller factor, it sets a lender’s mind at ease to know that you have a steady source of income and an employment history that has been very consistent. Bouncing from job to job or having long periods of unemployment is a recipe for disaster.
Looking for a Home Equity Loan with Bad Credit
Home equity loans aren’t always portfolio loans (the kind that banks keep as income generators), but they often are. This means that banks intending to hold on to your loan are making the rules -- they’ll decide on their own if you’re a good risk.
Because of this, it really pays to shop around. Check with several local bankers to find out what their rates and terms are for someone with credit like yours. You may be surprised how flexible lenders can be.