A home equity loan is the ideal financial tool for a person who is in one of the following situations:
a. needs money to pay off high-interest credit card debt, do home improvements, or pay for other major expenses
b. owns a home with equity (i.e. they owe the home less than it is worth)
A person in this situation has an advantage over someone who does not have a home with equity in it. That’s because an equity loan is a form of secured loan, as the lender can use the home as collateral in case something happens that would prevent the homeowner from repaying the loan. Secured loans typically yield lower interest rates than unsecured loans. Another word for a home equity loan is a second mortgage (2nd mortgage).
But what should you do if you have a bad credit score below 650 or even 600? Fortunately, since the loan is secured (using your home as collateral), you still have a good chance of securing a home equity loan if you know how and where to apply.
If you’re looking for a guaranteed home equity loan with a bad credit rating, here are 5 tips to help you find the right loan:
1. Determine your current points balance:
Start by knowing the facts about your credit score. Run your credit report with TransUnion, Experian and Equifax and find out your score from each of them. It is possible that your score is not as low as you thought. Even if this is the case, it’s still a good idea to run your reports, as it can reveal errors or misreported items that you can fix.
2. Find multiple lenders:
Now you need to create a list of several home equity lenders. In general, most mortgage lenders are also willing to give you a home equity loan. And some lenders actually specialize in this type of loan. The more lenders you can find, the larger your “universe” of potential lenders to choose from when looking for the best deal.
3. Reach out to both standard and “poor credit” equity investors:
Make sure your list includes both regular/standard lenders and those that advertise themselves as bad credit equity lenders.
4. Decide how much you want to borrow:
Decide how much you want to borrow, then calculate how much you can reasonably borrow to make sure it’s enough. Typically, most lenders will allow you to borrow up to 70% to 80% of the value of your home (taking into account your current mortgage balance and new equity loan combined). However, some allow up to 100% or 125% loans.
5. Apply to all reputable lenders on your list:
Finally, apply to all of the lenders on your list — at least the reputable ones. Do a little research to determine which are reputable by checking online discussion forums and consumer advocate websites. If you find few or no complaints, they may be reputable and trustworthy. Also, make sure the website is of high quality.
Consider these 5 tips when applying for a guaranteed home equity loan with bad credit.