Last week I walked you through the basics of home equity loans. There are thousands of people with bad credit, and they all have a big question – how to get a home equity loan? A poor credit score (lower than 600) is a big obstacle in acquiring any type of loan. A home equity loan appears to be the best option for the borrower and lender both, because it is secured by your home.
For home equity loans, poor credit isn’t a cause of worry because the lender benefits from relatively higher interest rates and other terms on bad credit loans. But it’s not always that easy. Here is what you need to do to ensure that you get a home equity loan at a reasonable interest rate.
Review Your Credit Report
First off, you need to know how bad your credit score really is. Get your credit report and review it for mistakes and inaccuracies. You might notice some inaccuracies that are hurting your credit score. They can be fixed by contacting the creditors directly or by asking the credit bureaus to contact the creditors for you.
The Ramifications of Poor Credit
Though the banks may agree to lend you money, the interest rates and terms you qualify for won’t be as good as those for people with good credit. Additionally, the lender may ask you to put a large down payment or they might offer loans lower than your equity. If you badly need a loan, the additional expenses are worth it.
However, you can improve your credit score over time by staying current on your loan. In case you default on the home equity loan, you run the risk of losing your house.
Calculate How Much You Can Afford
You have to carefully assess what amount you need to borrow and how much of that you can afford to pay back. Be realistic. Though the lenders thoroughly analyze you financial position, it is your responsibility to make sure that you can pay back. Sometimes the lender may pressure you to obtain a loan that is larger than you actually need or the monthly payments are far too high for you to pay back on time.
How Much Equity Do You Have?
Before you apply for a loan, figure out your equity in the house. You can do it by subtracting the mortgage balance from the current market price of your house. People with excellent credit score can borrow approximately 75-80 percent of their home’s equity.
[blockQuote position=”right”]Before you apply for a loan, figure out your equity in the house. [/blockQuote]
Additionally, collect all of your financial information to provide lenders with proof of your income, investments, your equity in the house, etc.
Shop Around To Get Home Equity Loan With Bad Credit
Spend some time asking for no-obligation quotes. All the lenders have different terms, look for the one that is most suitable to your needs. Carefully read their terms and conditions, see if there would be any prepayment penalties, balloon payments or any other hidden fees. Remember, you can find loans with good terms despite a poor credit, if you shop around properly.
Verify The Validity of The Lender
Just like you do in any other financial transactions, make sure that the lender you are dealing with is reputable and legitimate, before you give them any personal information. Stay away from a company that says your credit score isn’t that important, but requests to see your bank account information, SSN or other records. Likewise, a company is unethical if it requests a payment before performing any services. Make inquiries, check references, check with Better Business Bureau or Federal Trade Commission.
When applying for a loan online, take time to make sure that their telephone number and address are valid. If possible, visit the location, and look up business in the telephone directory. Do not trust the lenders that only have a P.O. Box.
Additionally, I advise you to discuss the issue with a trusted financial adviser. They will help you plan a budget such that you stay current on your payments. On time payments not only protect your house from foreclosure, but also improve your credit.
What do you think people with bad credit should do to get a home equity loan? I’d like to hear your opinion.