If your credit score is less than stellar, you probably know how hard it is to get approved for a loan. A home equity loan is different because it is a type of secured loan that uses the equity in your home as collateral. You don’t need a perfect credit score to be considered for a home equity loan, either. There are plenty of reputable lenders listed on the Home Equity Wiz site that can you compare and contrast. In the meantime, please read below for additional items of note to see if you qualify.
Debt-to-income Ratio
While credit score may be a determining factor in some lender’s formulas, usually debt-to-income ratio is more important. Because a home equity loan is secured by your home, lenders are more tolerant of risk. A debt-to-income ratio in the 40% region is where most lenders will approve despite credit score. The interest rate you’ll pay is highly dependent on this score, too. A DTI in the 40% region is perfect for most lenders. If your DTI is higher, you might need to shop around to find the right lender for you.
How Much Equity Do You Have?
Another factor that determines whether or not you can get a home equity loan is how much equity you have in your home. Lenders will let most homeowners borrow up to 80% of their equity in the home. That value is determined by what you owe on the outstanding mortgage subtracted from the market value of the house. To get the official market value of your home, your lender will require you to get an appraisal of the house according to fair market value. An appraisal can cost anywhere between $100 to $500, so be prepared for that upfront cost.
Credit Score Impact
You don’t need to have perfect credit to get a home equity loan, but lenders do like to see a score of 620 or higher. Your debt-to-income ratio and loan-to-value ratios can have some sway over how much your credit score impacts your chances. While your credit score may not matter much in the grand scheme of getting approved, it is the determining factor for interest rates. A low credit score means you will have a higher interest rate attached to the home equity loan.
The baseline 620-639 credit score pays 12.592% APR on their loan. The highest bracket at 740-850 credit score pays half that with a 6.592% APR loan. The 620-credit score monthly payment is $537, while the 740-credit score monthly payment is $319. It is not impossible to get a home equity loan with bad credit, but the interest charges will be significantly more.
Tips for Home Equity Loans with Bad Credit
If your credit score is less than stellar and you need a home equity loan, keep these tips in mind:
- Always know the interest rate you will be paying and whether it is variable or fixed. A variable interest rate could lead to much higher payments down the road.
- A HELOC comes with a draw payment where only interest payments need to be made. This rate is variable and usually lasts five to ten years. At the end, a fixed-rate repayment period is set, and payments will need to be made regularly to pay the balance in full.
