You have bad credit so you assume you will never be able to secure a home equity loan. The good news is that you are wrong. There are ways to get a home equity loan with bad credit. You just have to know where to look and what steps to take.
Look at your Credit
The first step to take is to look at your credit. What you think is bad might not be as bad as you think. Every lender has a different threshold for “bad credit.” Let’s say, for example, you paid your credit card late once so you assume you have bad credit. Sure, that late payment affected your score, but it did not ruin it entirely. There are many factors that make up a credit score; late payments are just one piece of the puzzle. The algorithm that compiles your credit score uses the number of accounts you have; the age of the accounts; the number of payments you make on time or late; and the amount of outstanding credit you have in order to determine your credit score. So even if you have a late payment, if everything else falls into line, you might not have as low of a credit score as you think.
Once you know what your credit looks like, you can start to shop around. Knowledge is power when it comes to shopping for a home equity loan, though. When you know what to tell lenders so that they understand the full parameters of your situation, they can help you the best. Not every lender avoids people with bad credit. They will want to know why you have a low credit score, though. Is it because you had a specific issue, such as a one-time illness that made it hard to work and pay your bills? Or maybe you overextended your credit and now you are trying to get back on track.
Whatever the case is for you, the lenders will want to hear it. This way they can determine if they can help you. What one lender will deny another might approve. You have to have your reasons, though. Let’s say for example you want a home equity loan in order to consolidate your debt. If the consolidation gives you a lower payment overall, then your debt ratio will decrease and your ability to pay the bills on time will be greater. There are lenders out there that are willing to do this, but you have to shop around.
Have a Plan for your Home Equity Loan with Bad Credit
Aside from hopping around to look for the right lender, you need to have a plan. You need to be able to tell the lender straight up what you plan on doing with the funds from the home equity loan. It is not enough to say that you just need funds. The lender needs to hear what you will do with the funds. A few examples include:
- Fix up your home
- Pay off other debts
- Have reserve funds handy for an emergency
Once the lender knows your plan, they can better determine your level of risk. For example, if your plan is to fix up your home, the lender needs to know why you need to fix it up. Are you fixing things that are broken or are you making changes? What are the changes for? Are you adding a bedroom for a new addition coming into your family or do you wish to modernize the kitchen? The lender will determine the benefits of what you plan to do with the money to determine your level of risk.
Don’t Give Up
The key is not to give up when you want a home equity loan, even if you have bad credit. Remember, every lender looks at credit scores differently. What one lender considers bad another might not see a problem with at all. Bigger lenders tend to be more lenient with the home equity loans too because they can handle more risk since they can diversify with their larger portfolio and assets. This means if one lender turns you down, go ahead and turn to another lender – there are many lenders out there that might just say yes to your application.
Getting a home equity loan with bad credit is not as hard as it seems. You have to be willing to do a little homework on yourself and on the various lenders available, but the effort is worth it. In the end, you secure a home equity loan that helps you either consolidate debt or make the changes to your home you always wanted to make.