Information on Getting Home Equity Loans with Bad Credit

Bad credit home equity loans are possible but will cost the borrower much more due to high interest rates. Home equity loans are secured against the part of a home the borrower owns; secured loans are easier to obtain with bad credit than unsecured loans. The lender simply determines a limit based on the amount of equity the borrower is hoping to monetize. Unfortunately, if the borrower does have bad credit, the cost will be much higher.

Limits versus Rates

There are two major portions of a home equity loan, and only one will be affected by your credit score. The first portion is the limits. Since you are placing collateral of a certain value, your limits will mostly be determined by this collateral. Your income will also have an impact on how high your limits will go. The second part, the interest rate, is what is largely affected by your credit score. Lenders will protect themselves against the chance you will default by assuming a very high interest rate on each payment. If you are willing to pay more for a loan, you will be able to find a home equity loan based on the collateral you are placing.

Preparing Your Credit

If you can wait about one year prior to seeking a home equity loan, you can prepare your credit sufficiently to lower your interest rate a moderate amount. The longer you wait, the more chance you will have of repairing past damages. With just 12 months, though, you can take these steps to drastically improve your score:

  • Reduce the balances on your existing credit lines to less than 10%.
  • Close some unnecessary credit cards. Closing too many cards at once will drop your score. However, having too many cards open is also a problem. As such, aim for a moderate number of open credit lines.
  • Make all installment payments, especially mortgage payments, on time. Any late payment within the last two years will affect your interest rate in a negative way.
  • Consider taking out a high risk personal loan for 6 months to 1 year. Instead of spending the money, put it aside to pay back the loan immediately. You will need to spend a few hundred dollars in interest payments. However, this can save you a few thousand in the future with your home equity loan.

Negotiating for a Lower Rate

If you do not have time to prepare your credit sufficiently, you can use some tools to negotiate for a lower loan rate. You can opt for worse terms in exchange for a lower rate. Those terms may include a higher minimum monthly payment or high prepayment fees should you modify the loan in the future. You may offer to take a lower loan to value ratio on the equity you are collateralizing. For instance, instead of taking a loan of 80% of your equity value, seek a loan worth 60% of the value. The lender will have an asset much more valuable than the cost of the loan if you default. 

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