Bad credit? You can still get a home equity loan
A home equity loan is money you take out of the value of your home to use as you wish. Most people borrow against their home for renovations or to send their kids to college, but the loan really can be used for anything you want.
See: With home equity at record highs, is it time to take advantage?
Find: 6 reasons to tap into the equity in your home
Typically, home equity loans are hard to get if you have bad credit. This could mean a score between 620 and 580 or less.
Depending on your credit status, it may be difficult to find a lender who will give you a loan. That said, there are things you can do to increase your chances of getting approved.
Choose a lender who will work with you
Some lenders work with borrowers who have poor credit scores. This will be the first stop if you are worried about getting approved. Small local banks and credit unions are a good place to shop around for interest rates and quotes if you’re concerned about bad credit. Smaller banks often have more underwriting flexibility and may not be as strict as larger banks.
Online lenders, who don’t have to worry about the expenses of physical banks, also have a bit more leeway when it comes to making loans. These can include lenders like Rocket Mortgage and Lending Tree, who can pass on their expense savings 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 considered by banks when approving loans. This figure is a measure of how much of your monthly income is used to pay your debts each month. For example, if you earn $10,000 per month and have $4,500 in debt repayment each month, your DTI is 45%. Lenders prefer to see a DTI of 45% or less, although some may accept up to 50% in some cases, according to Forbes. If you have bad credit, you’ll get as low a DTI as possible to qualify for a home equity loan.
Check Out: 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 net worth to take out a loan in the first place. The first step is to have the home appraised, which usually costs around a few hundred dollars. This will give you a ratio of the current appraised value of the home to your current mortgage. Each lender has their own ratio that they prefer to see, and they can let you know when you meet with them to discuss the equity loan.
Understand the product
It is important to remember that home equity loans can be very risky if not approached at the right time and with the right assets. You take out a loan on your home, which means that if you can’t repay it, you risk losing your home. Many people use 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 money they actually can’t afford. That’s why it’s crucial to make sure your finances are in order BEFORE applying 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 way to fix your finances, but rather to improve an already stable financial situation. Bad credit isn’t the end of the world, but there is a difference between bad credit because of circumstances and bad credit because of behavior, and it’s up to the consumer to discern where they stand and where they stand. he can really afford another loan.
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