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Bad Credit Home Equity Loan

Home Equity Loans offer low interest rates and tax deductibility, which has made this loan product popular among homeowners during the past two decades.

For borrowers with bad credit, a home equity loan can be a way to consolidate existing debt to a lower interest rate --but the risks are high, since failure to repay a home equity loan can result in the loss of your home.

While a home equity loan is one possible option for homeowners with bad credit, there are also certain obstacles. Follow the steps outlined below to improve your chances of receiving a home equity loan:

Get a credit report

If you are attempting to get a home equity loan with bad credit, the first step is to get a copy of your credit report. Boosting or repairing your credit before searching for a loan will greatly improve your chances of being offered a loan, as well as potentially lowering lender interest rates. A higher score makes all the difference in the long run.

Knowing your credit rating will also be helpful when you finally begin to search for a lender. Avoid being taken by surprise, either by negative activity on your credit report or by your credit score in general. Always check your credit history before the loan application process, and report and fix any errors before you sit down with a lender.

Improve Your Credit Score

bad credit home equity loan

As you prepare to apply for a home equity loan, focus on improving your credit score. Many borrowers delay borrowing for six months or a year, until they have improved their credit score and are able to negotiate a better rate.

The first step to improving your credit is to understand why it needs improvement to begin with. Stop making the same mistakes or following the same patterns that got you into debt in the first place. If you have bad credit, it's time to analyze your spending habits and make some critical changes.

The basic rule for getting out of debt? Spend less than you earn. Devise a plan and schedule for improving your credit. Always pay your bills on time and avoid purchases that you cannot afford.

Take advantage of the resources around you; enlist family and close friends to cheer you on, and consider hiring a financial coach to help you learn new habits. Check out ReadyForZero.com, a website that offers free tools to help you track your progress as you reapay your debts and raise your credit score.

If you decide to proceed with a bad credit loan, you should consider the loan a temporary solution. Since borrowers with low credit scores will inevitably pay higher interest rates, you should focus on raising your credit in preparation for a refinance. Once your credit has recovered, you can refinance your loan with an improved interest rate.

Be Aware of the Risks

If you already have a low credit rating as a result of high debt or late payments, you should consider all of the risks involved with securing a home equity home loan before proceeding.

Home equity loans require particular attention, since failure to repay this type of loan may result in home repossession. If you plan to use the loan to consolidate your existing debts to one lower interest rate, it's time to be honest with yourself about your financial habits. If you run up multiple credit cards for a second time, there will be no more home equity to borrow and you could quickly loose your home.

For this reason, many borrowers choose to take out a personal loan rather than borrowing against their home. While this type of loan is still the best choice for many, borrowers with bad credit who are considering a home equity mortgage loan should keep in mind that these loans require extreme financial responsibility.

Qualifying for a Bad Credit Loan

When you apply for a home equity loan, be prepared for the lender to examine your credit history to assess how much risk is involved. For borrowers with bad credit, lenders will often base their assessment on payment history; borrowers with inconsistent payments in addition to poor credit will find lenders reluctant to make any offers. However, loan-to-value ratio also factors into the equation, as well as a borrower’s income and job history. Therefore, prospective borrowers with consistent payments, employment, and income will have little trouble dealing with obstacles presented by bad credit.

bad credit home equity loan

Explore your  bad credit loan options

When securing any type of loan, whether you have a good or bad credit score, always explore your options and compare rates and lenders before committing to a loan. Minor differences in rates can translate into hundreds if not thousands of dollars saved or squandered, so always be patient when looking for the right lender. Visit our Find a Lender page to conveniently view nearby lenders in your region and start shopping around today for the best rates.

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