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How to Get a Home Equity Loan with Bad Credit

Homeowners with bad credit looking for a home equity loan should first review their credit report for any errors.

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In this high inflation environment, many are struggling to manage their spending. Things like gas, groceries and childcare can add up quickly. Add in any variable debt you have, such as from carrying a credit card balance, and it can be difficult to meet.

While you don’t necessarily want to dig yourself a deep hole, some homeowners find that Borrowing against their home equity Gives them the breathing room they need.

Perhaps you’ve improved your spending habits and are comfortable taking on new debt, but the decisions you made when you were younger are catching up with you. If you can repay the loan at high interest a Home equity loan or HELOCFor example, you can save money on interest payments.

But if you have bad credit, can you still qualify for one? Home equity loan? It depends on what your credit report looks like and the lender’s requirements.

That said, you often need one Credit score To get a home equity loan at least 680. Some lenders will go below that number, but in general, the lower your credit score, the harder it is to find a lender and get favorable terms.

However, there are steps you can take to improve your chances of qualifying A home equity loan And find more favorable terms. If you think a home equity loan might be advantageous for your personal financial situation, start exploring your options.

How to Get a Home Equity Loan with Bad Credit

Here are five ways to improve your chances of getting a home equity loan with bad credit

Review the credit report for errors

Errors on your credit report can lower your credit score. A Federal Trade Commission (FTC) survey found that about 5% of people changed their credit score by more than 25-points by correcting credit report errors, so it makes sense to check and dispute errors, which you can do for free. The FTC recommends consumers check their credit reports for free from the three major credit bureaus once every 12 months through AnnualCreditReport.com.

You may have paid off a balance that is still showing as unpaid on your credit report. Or maybe you never opened an account that shows up on your credit report, which could be a sign of identity theft that you want to correct before it does more damage.

Make sure you have enough equity

If you try to take out a home equity loan that, when combined with your mortgage balance, leaves very little equity in your home, the interest rate may be higher. And if you’re struggling with your credit score, it makes it even harder to get a good term.

So, talk to lenders about how different combined loan-to-value (CLTV) ratios affect interest rates. Many lenders will go for around 85% CLTV, but you’ll probably get better terms if you take out a home equity loan with a lower ratio. Or maybe you’re trying to qualify for a 90% CLTV, but the lender will only do it for a borrower with a higher credit score.

In that case, you can wait to take out a home equity loan until, say, real estate conditions potentially improve where the value of your home gives you more equity.

You can now check your home equity loan eligibility here.

Stop activities that could further lower your score

In addition to addressing issues like credit report errors and fraud, you can improve your credit score by stopping activities that have a detrimental effect.

For example, a high credit utilization ratio, such as from maxing out your credit cards each month, can hurt your credit score. Keeping your credit utilization ratio below 30% is a good rule of thumb, but ideally, you want to stay between 1-9%, Experian says.

So, if your credit limit for a credit card is $10,000, you can limit your spending on that card to $100-900 per statement and pay it off each month. Remember that your credit utilization applies to specific accounts as well as your overall debt.

Over time, good habits can improve your credit score.

Lower your debt-to-income ratio

Another way to improve your chances of qualifying for a home equity loan with bad credit, especially without paying super-high interest rates, is to lower your debt-to-income (DTI) ratio.

For this area, the rule of thumb is that you want your debt to add up to a maximum of 43% of your income. But perhaps getting significantly below that limit will make a lender more willing to work with you even if you have bad credit.

How can you reduce your DTI ratio?

Suppose your family has two cars, each with a car loan. Yet maybe you and your spouse both work from home and you don’t need two more cars. In that case, you may be able to eliminate that debt by selling your car, which will lower your debt-to-income ratio.

Shop around

Finally, if you have bad credit, don’t assume that if one lender turns you down, everyone else will. Different lenders have different requirements, so shop around and see who is willing to work with you and what their terms are.

Even if you don’t qualify for a home equity loan yet, you can get a better idea of ​​what to look for by shopping around. Perhaps you can find a lender that has minimum credit score requirements that you think you can reach within a few months, and having that benchmark can motivate you to get there. You can shop for home equity loan lenders here.

Bottom line

Overall, having bad credit can make it more challenging Get a home equity loan, but it is not impossible. You may need some patience to find a lender and/or improve your credit score, but you probably don’t want to rush into this decision.

If you’ve made rash borrowing decisions in the past that lowered your credit score, for example, you probably don’t want to make that mistake again, especially since you’ll be putting your home at risk of foreclosure if you don’t pay. Loan repayment.

But if you’re confident that you’re in a strong financial position and can handle a home equity loan, it may make sense to find a lender that will work with your credit situation.

MoneyWatch: Managing Your Money

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