Home equity financing is a great way for homeowners to turn cash from their home into cash. For homeowners with poor credit, these private loans offer a way to borrow money that is more likely to be approved and offers lower interest rates than traditional loans or revolving lines of credit. Why? First, the home serves as collateral or collateral, and second, the equity in the property can make up for the shortfall in your credit history. This is especially true for homeowners who have a large amount of equity in their home.
The downside is that you can expect to attract less favorable terms on your home financing, and the financing will come at a higher level. cost. Two examples: You may need to borrow a smaller amount to minimize risk to the lender, and more collateral (higher principal) may be required to secure it. Lenders typically lend up to 80% of the home value of a house. However, the more equity you have established, the more attractive your application will be. Since your home is being used as collateral, you will be viewed as a lower risk candidate if you own 20% or more of your home. This can be particularly helpful when you have a poor credit score. Here’s what you need to know to secure the financing you need.
Home Equity Loans vs. HELOC
There are two main types of home equity financing. The first is a home equity loan, in which a lump sum is borrowed and repaid in regular installments, usually at a fixed interest rate over a period of 25 to 30 years. The second is a home equity line of credit (HELOC), where the lender authorizes the borrower to withdraw money as needed. Most HELOCs have an adjustable rate, interest-only payments, and a 10-year “draw” period, during which the borrower can access the funds. After the draw period ends, the outstanding balance must be repaid over an amortization period (typically 15 years). (For additional information, read “Home Equity Loan” vs. “HELOC:
8 Steps to Equity Financing
Here are the steps you need to take to get a home equity loan or HELOC.
1. Study your credit report.
Get a copy of your credit report so you know exactly what you’re up against. (You’re entitled to a free one each year from the credit reporting agencies: Experian, TransUnion, and Equifax.) Review the report thoroughly to make sure there are no inaccuracies that will cause further damage to your score (you should do this routinely).
2. Prepare your finances.
Gather your financial information (such as proof of income and investments), so it’s ready to present to lending institutions. They will want to see in black and white that you are financially stable enough to support your loan, especially if you have bad credit. If possible, pay any outstanding debt that may have an adverse impact on your application.
3. Compare rates.
It makes sense to go directly to your current lender for home equity financing, and since you’re already a customer, the lender may offer a more attractive rate. However, this is not guaranteed, especially if you have a bad credit report. The best rates are offered to those with good credit, so it always makes sense to shop around, especially when it comes to bad credit. Experts say it’s a good idea to work with a mortgage broker who can help you evaluate your choices and guide you to reputable lenders.
4. Consider how much money you (really) need.
What is the purpose for which you are borrowing? And how much do you really need to borrow? It may be tempting to shoot for the stars to maximize your loan amount, perhaps to provide a financial cushion, but this comes with the temptation to spend it. If your spending habits are under control, it can make sense to “borrow,” and by using a HELOC, you’re only paying interest on the funds as they’re spent. However, in the case of a home equity loan, you’ll pay full interest (and principal) on the entire lump sum loan, in which case you’ll probably be paying to lend specifically for your needs.
5. Don’t dive.
Don’t say “yes” to the first offer. By getting multiple quotes, you’ll be in a better position to negotiate a better rate. Make your first offer to another lender and see if you can beat it, and don’t forget to research all associated loan fees (such as processing and closing costs), so you don’t have any rude surprises.
6. Bring a co-signer.
To sweeten the deal, it may be a good idea to bring in a co-signer. A cosigner uses your credit history and income to serve as a guarantor for the loan. Be sure to choose a bondsman with impressive credit, good job stability, and a sizeable income to maximize your chances of approval.
7. Look at subprime loans.
As a last resort, you can turn to lenders that offer subprime loans, which are easier to qualify for and are geared toward poor credit borrowers who don’t meet traditional credit requirements. Subprime lenders typically offer lower loan limits and higher interest rates. However, these loans carry much higher risk and higher fees than conventional fixed-rate loans and should be avoided if possible.
8. Work on your credit.
If you find that your poor credit history is really working against you, ask your lender why they’re not cooperating and what they’d like to see from you (and your credit report) in order. to provide a better rate. Remember, it’s never too late to change your credit score. You may want to consider putting your loan plans on hold while you take steps to improve your score. Mortgage lenders generally look at the dollar amount, payment history, and the “age” of your lines of credit. Do you frequently open new accounts, miss payments and accumulate balances? Just changing one of these behaviors can positively affect your credit score.
And remember …
A home equity loan spreads out the mortgage debt on the property, which can leave the borrower in a vulnerable position (and unable to keep up with monthly repayments) if employment, income or circumstances suddenly change. Perhaps the biggest drawback associated with equity financing is that the bank could foreclose on your property if your ability to make repayments is compromised. And you can get heavy penalties for late payment in case you fall behind. This further puts your credit reputation at risk, as banks will report your delinquencies to the credit reporting agencies.
The Bottom Line
Are you a homeowner with bad credit? You can still tap into the equity in your home for cash, but you may not enjoy as much borrowing freedom as someone with absolutely clean credit. Despite the “instant cash” appeal of home equity financing, the decision to obtain it should not be made lightly. It’s more debt, after all, and there are predatory lenders ready to take advantage of people with less than stellar credit. Compare rates and offers at multiple lenders, and even consider hiring a reputable mortgage broker to connect you with viable options.
