Before we talk about home equity loans and how to get one with bad credit, let’s look at some basic definitions to get a clear idea of all the terminologies we will discuss in this article.
What is Home Equity?
Home equity is the difference between the current market value of your house and the amount that you owe in the mortgage. Suppose your house is worth $500,000, and you owe $200,000 on your mortgage. This would mean that you have an equity of $300,000 on your home. Equity is directly proportional to our ownership of your house. When you say you have equity, you’re essentially saying that you own $300,000 worth of your home, and it’s clear of all dues and loans.
What is a Home Equity Line of Credit?
You can tap into your home equity to borrow money from lenders for a second mortgage or other significant payments using your home equity as collateral.
Home equity lines of credit serve as a resource of funds that you can withdraw money from. These “lines of credit” are lent to you based on your home equity and are usually worth 85% of your equity.
So, if your home equity is $150,000, then you are eligible to draw credit lines of up to $127,500 for a set amount of time, usually ten years. You can make money from these credit lines as you please and then repay when you can. A repayment period of 20 years is allowed to return all the borrowed money.
What is a Home Equity Loan?
A home equity loan is a one-time payment or loan that you take based on your home equity. You use the home equity as collateral in this case as well. A home equity loan is taken out with your home equity as security. This sum is paid to you at once, and monthly fixed payments are made to return the loan. If you do not comply with the loan terms, the lender has the right to foreclose on your home.
How to Secure a Home Equity Loan with Bad Credit?
Getting a home equity loan with bad credit is actually easier than getting a personal loan with bad credit. This is because a home equity loan uses your house as collateral and is thus a secured loan. Lenders are more likely to invest in a secured loan with the property as collateral.
However, you will still need to have:
● A low debt-to-income (DTI) ratio
● High income
● At least 15% equity in your home
Before you move on to looking for home equity loans with bad credit, make sure you fulfill the minimum requirements of a home equity loan with bad credit. These include a minimum credit score of 620, a maximum 50% DTI and stable employment history.
How to Apply for a Bad Credit Home Equity Loan?
Before you apply for a bad credit home equity loan, here are a few things you need to take care of.
- Analyze your credit report to correct any errors and improve your credit score before showing it to a lender.
- Use a DTI calculator to find out your debt-to-income ratio. If the ratio is 40% or less, you’re in clear waters.
- You need to have at least 15 to 20% equity in your home. The more equity you have, the lower your interest rates will be.
- Lenders usually allow you to borrow 85% of your equity. Figure out how much money you will need and make sure you’re only taking what you need.
Now that you’re all set, you can find a good home equity loan provider to apply for a loan.
Top 3 Home Equity Loan Lenders
Here are the best bad credit home equity loan providers in 2021.
- Discover – Discover provides the lowest interest rates on bad credit home equity loans. Rates start from 4.15% to 11.99%.
- Spring EQ – Spring EQ provides fast funding with interest rates starting at 5.205% and up to $500000 in loan.
- KeyBank – KeyBank is an excellent solution for homeowners with limited equity. With interest rates starting from 2.32%, KeyBank goes upward from $25,000 in loans.