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If you need to pay for a major expense but you have bad credit, a home equity loan—also referred to as a second mortgage—could be worth considering.
A home equity loan (HEL) allows you to take out a large sum of cash from your home. Similarly, a home equity line of credit (HELOC) is where a lender sets aside an amount of money that you can borrow when needed. A lender uses your home as a guarantee for both options, so an excellent credit score isn’t required to get approved.
Learn more about how to get a home equity loan even with a bad credit score and whether it’s right for you.
Apply for a home equity loan with many lenders to compare costs, interest rates and loan agreements. There are various places you can look, such as a broker, loan originator, bank or credit union.
Lenders will do their due diligence before making their decision on your approval. Here are some things you can do to determine generally how likely you are to get approved:
Home equity is the difference between the current value of your house and what you owe on your mortgage. It takes most homeowners years to accumulate equity, but a dramatic rise in real estate values in your area can contribute to more equity earlier on.
Many factors come into play when a lender considers you for a home equity loan, including your loan-to-value (LTV) ratio.
Your LTV is the amount of a loan you’re requesting compared to the market value of your property. For example, if you owe $300,000 on your home, which has a market value of $500,000, you own $200,000 in equity on your home and your LTV ratio is 60 percent. And say a lender allows you to borrow 80 percent of your LTV ratio. By following our equation below, you can borrow $100,000 on your home.
There’s a lot to consider when deciding if a home equity loan is the right choice for you. Consider the advantages and disadvantages of taking home equity out on your home before applying.
There are many advantages to taking out a home equity loan, especially if you’re using it to improve your home.
It might be enticing to take out a home equity loan, but remember that you will pay interest back on the amount of money you borrowed. So as a rule of thumb, only take out as much as you need.
Equally weigh the advantages and drawbacks before making a decision.
Although having bad credit can make it more difficult to qualify for a loan, you might have a better chance with a home equity loan. Do your research on all of your options and alternatives before making your decision on how you’ll get a loan.
Even if you’re dealing with a low credit score, know that it’s not set in stone. You can always improve your credit score by reducing your debt, paying on time and keeping your credit utilization below 30 percent. The more you can improve your credit score, the better chance you have of getting a lower interest rate on your home equity loan.
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