How to Get a Home Equity Loan with Bad Credit: A Step by Step Guide

Some believe that it is impossible to get a home equity loan with bad credit. But that is not the case. Yes, a low credit score will certainly make it harder and more costly to get approved for a loan, but it’s certainly not impossible. Here are a few ways to make it happen:

1. Find out what your credit score is- and begin to work on improving it.

The first step to improving your credit is knowing what your credit score is. Luckily you can find out this information, free of charge, at AnnualCreditReport.com. Your bank or credit union may also offer you free access to your credit report and credit score. 

In most cases a credit score of 620 or higher is needed to be qualified for a home equity loan. Some lenders may allow lower scores. If your score is currently below 620, you will need to work on improving it. This will increase your chances of qualifying for a home equity loan and ensure that you get an affordable interest rate.

The first step to improving your credit score is to review your credit report and make sure that there are no errors. If there are accounts that you do not recognize, or a creditor has incorrectly marked something late, make sure you reach out to the credit bureau. Your credit score should improve once the errors are corrected.

2. Look at your debt-to-income ratio.

Besides your credit score, lenders will also look at your debt-to-income ratio. In other words, how much of your income is going towards debt repayment and housing costs. 

Most lenders require a debt-to-income ratio of 43% or less. No more than 43% of your monthly income should be being used towards debts.

3. Determine your equity and loan-to-value ratio.

If you have bad credit, having a low loan-to-value ratio can be helpful in helping you get a home equity loan. Having a low loan-to-value ratio means that your loan amount is only a small percentage of your home’s value.

Most home equity lenders set their maximum loan-to-value ratio at 80% to 90%. However, if you have bad credit, your limit will probably be lower. The less you borrow, the lower your loan-to-value ratio is, and the easier it will be to qualify.

4. Get a consigner.

Most mortgage programs will allow a borrower who has poor credit to qualify by adding a cosigner who has better credit. If you have a family member with good credit, try asking this person to be your co-signer. This will help you qualify for the loan and may help you get a lower interest rate. Keep in mind that your cosigner will be liable for the loan balance if you fail to repay it. In addition, any late payments that land on your credit report will probably land on theirs as well, harming their credit score. Finally, cosigning creates contingent liability (the possibility that the other person might have to assume your obligation). This can hurt your cosigner’s ability to borrow in the future.

If you are able to make payments on time, getting a cosigner may be a good option for you.

5. Compare a few different lender options.

The lower the credit score, the higher the interest rate on a home equity loan is. This is why it is very important to compare quotes from a number of lenders before choosing the right one.

To do this, you should find three to five lenders and fill out their pre-qualification forms to get a rate quote from each one of them. They should give you a loan estimate form that you can use to compare rates and fees line by line from each company. Examine the monthly payment, the interest rate, the total cost over the life of the loan, and the origination fee.

6. Work with a debt relief company to improve your credit score.

If your credit score is bad because you can’t afford your debts, talk to a debt relief professional. They are able to help you get on a debt management plan or negotiate a settlement to improve your financial situation going forward.

At CuraDebt we help negotiate with your creditors. You never have to worry about communicating with them on your own.

If you would like to learn more about debt settlement please call us today. 1-877-850-3328