There could be a number of reasons why you might want to take a loan.
However, if you have a bad credit score, things could get difficult as a bad credit score means you will most likely not receive a low-interest rate or your loan application may get rejected altogether.
In such a case, a home equity loan may be the solution for you. Even with a bad credit score, it is very likely that the home equity loan will get approved, and you can also get a lower interest rate compared to a traditional loan or a line of credit.
This is because your home or property is the collateral here, which makes you less of a risk for the lender.
You can get a home equity loan of an amount up to 80% of the equity in your home.
The greater the equity you have in your home, the more suitable a candidate you are, and even more so if you own 20% or more equity.
Let’s take a look at what you need to know if you want to get a home equity loan with bad credit score.
Home equity loans are of two types, HELOC (Home Equity Line of Credit) and the traditional home equity loan.
A home equity loan allows you to borrow an amount of money that you can repay through installments over a term of 10 to 30 years with a fixed interest rate.
On the other hand, in HELOC, the lender sets an amount of money aside which you can borrow on a revolving basis, as and when you need to.
HELOCs usually have adjustable interest rates, and a 5 to 10-year draw period during which you can draw the money.
After this draw period has ended, you need to repay the outstanding amount over a definite term.
It is very important that you get a copy of your credit report before getting into any process and check it thoroughly to get an idea of your situation.
You are entitled to a free credit check every year so we would suggest you make use of it. Go through the report to check for any errors that may be hurting your credit score.
Gather all your relevant financial information like investments and proof of income to present them to the lenders or banks.
The lenders and banks need to see these documents to determine whether you are financially secure enough to repay the loan especially when you have a bad credit score.
Paying off outstanding debts that are affecting your credit score can help you improve it.
It might seem tempting to aim for a loan amount greater than what you actually need.
However, that is only doable if you think you can resist the temptation of spending all that money elsewhere.
If you can control your spending, it may be alright to borrow a bigger loan amount and through HELOC you will only have to pay interest on the amount of money you have actually taken out.
Although, in the case of a home equity loan, you will have to pay the full interest, and thus it is advisable to only borrow what you need.
It is quite natural to go to your existing lender for home the home equity loan and as you are an existing client, the lender may offer you a more appealing rate.
However, if you have a bad credit score, there can be no guarantees and thus it is a wise move to shop around for interest rates and offers.
By shopping and acquiring multiple quotes from various lenders you will be in a much better position to compare mortgage quotes and get the best possible interest rate.
While comparing different loan offers, do not forget to go through the different costs associated with the loan.
Make sure you ask the lender about the loan processing fee and closing costs. This way you can then compare all the offers on a single scale.
To position yourself better for the loan, it might be a good idea to hire someone with a good credit score as a cosigner.
This person who has a good credit history can serve as a guarantor for your loan.
To maximize your chances of approval, make sure you choose a cosigner with a remarkable credit score, good job stability, and a considerable income to increase your chances of getting the approval.
You may consider lenders offering subprime loans as a last resort.
These loans are easier to qualify for and are meant for borrowers with poor credit scores who do not meet the requirements for other loans.
Subprime loans generally have lower loan limits and very high rates of interest.
If you have a bad credit score, you can ask your lender what you can do to improve it and if possible, put your plan of borrowing on hold while you are taking the required steps.
If you want to get a loan with a bad credit score, home equity loans could be the go-to option.
You can qualify for the loan as it is backed by your home itself as collateral. However, one major risk with the home equity loan is that you will risk losing your home if you can not repay the loan for some reason.