How To Get A Guaranteed Home Equity Loan For Bad Credit

Posted on March 13, 2021 in Loans

Trying to get any type of loan when you have bad credit can be quite a challenging ordeal. While not the only influencing factor to a lender, your credit score is arguably the single most important one for most lenders when deciding whether to accept the loan application or not. 

When it comes to getting loans based on your home’s equity and value, there are a few choices, but some are riskier than others. With bad credit, there are limited options, but it’s important to know what you’re getting into before agreeing to anything. 

What Is A Home Equity Loan?

The first thing to address is the definition of a home equity loan and how it works. 

Anyone that owns a house and has made payments on a mortgage has equity. Even if the mortgage is not completely paid off there will still be equity in the home. This is calculated by taking the home’s current market value and subtracting the remaining debt left on the mortgage. So a home currently valued at $300,000 with a mortgage of $180,000 would have an equity of $120,000. However, this does not mean the entirety of the equity can be borrowed, as it’s often capped out at 85%, and the total amount being lent will vary depending on the lender and your personal financial information. 

A home equity loan works as an installment loan, meaning that the lump sum of the total amount granted will be given and repaid in monthly installments for a fixed amount of time. The interest rate will depend on the lender and will be calculated into the payments and divided evenly between the months. This will work as a second mortgage on the home. 

A home equity loan is considered a secured loan as the house will be offered as collateral. As a result, interest rates are typically lower but failed to repay the loan on time could result in foreclosure of the home. 

What Are The Qualifications For A Home Equity Loan?

Depending on the lender, there will be many varying standards and preferences for who qualifies for a home equity loan. It’s important to shop around and compare the various rates and terms before agreeing to an offer to get the best possible rates. Although these requirements may be different from the lender you find, here are a few common examples of standard lender qualifications:

  • Home equity of at least 15% to 20% 
  • A minimum credit score of 620
  • Maximum debt to income ratio of 43%
  • On-time bill payment history
  • Stable employment and income history

How To Get A Loan Without Meeting These Requirements

In the event that the qualifications listed above can not be met and you are unable to find a lender to offer up a home equity loan, there are still options available. One of the most common and easiest options would be to seek out what is called a hard money loan.

What Is A Hard Money Loan?

While traditional lenders emphasize credit scores, credit reports, and income, hard money lenders take a different approach. They lend money based on the collateral that secures the loan and is less concerned with the ability someone has to repay the loan. If a loan can not be repaid, hard money lenders intend to get their money back by taking the collateral and selling it. Therefore the value of the collateral is more important than the financial position of the borrower. 

Think of it as a pawnshop for homes. If the debt is repaid, the lender will make money based on the interest, but if the loan is not repaid, the lender gets an item they can sell for a hefty profit. 

How Do Hard Money Loans Work?

A hard money loan is similar to most other secured personal loans however, hard money lenders are not regulated by the Federal Reserve like banks and other conventional loan creditors are and so practices can vary significantly. As a result, it’s hard to talk firm details about rates, terms, fees, or other procedures without generalizing. 

What can be expected from a hard money loan are a shorter term and higher interest rate than other traditional options. Most home equity loans will last for 10 or more years and currently have an average interest rate of about 5.8%. Hard money loans are generally much shorter in terms and only last five years at most, and the interest rate is much higher, routinely ranging between 11% and 18%. 

Just like a home equity loan, a hard money loan will also require the loan to be repaid by a set date, and failure will result in forfeiture of the home. 

Why Use Hard Money?

Clearly, a hard money loan will come with less desirable terms than a more traditional home equity loan, but there are still some benefits to them as well. These are some of the ways a hard money loan is superior to a standard home equity loan:

  • Speed: As a result of the lender being more focused on the collateral than the financial position of the borrower, they will move quicker to approve a loan. A hard money lender may not prefer taking possession of the property, but they are more prepared for it. They would have less of a desire to go through an application so strictly and have less of a need to verify income and review bank statements, and so on.

    The process for a home equity loan could take months to sort out while a hard money loan is usually only a few weeks.

  • Flexibility: Hard money lenders don’t use a standardized underwriting process for their loan offers like most home equity loan lenders. As a result, they are much more flexible with the terms and details of loan agreements. Specifics such as repayment schedules may be up for negotiation, whereas in a home equity loan, the terms will be firmly set. After all, a hard money loan will be coming from an individual who would be much more willing to talk and deal as opposed to a large corporation with strict policies and practices.

  • Approval: The most important factor to a hard money lender is the collateral involved. Negative items on a credit report would matter much less to a hard money lender, and some may not even check it at all. A standard corporation that offers home equity loans will want their money back and not property, but a hard money lender is satisfied with either option.

    For these lenders, they will either get their money back, with a fairly significant amount of interest, or a property that could be resold for a large profit. Either way, they will be rewarded.

Co-signing On A Loan

There is another option available to those with bad credit that need a home equity loan. This option will require someone to co-sign their loan and have significant income and good credit history. A co-signer would not have to be on the deed of the home in order to sign.

Basically, the way it works is this co-signer will apply along with the homeowner for the loan, and their credit history can help to meet the requirements for the loan. This option can be risky for the co-signer because if payments are not made, the lender could seek collection efforts from the co-signer to recover the money. If there is someone in your life willing to sign on to a loan, it could be a strong alternative to a hard money loan.

The Takeaway

Getting a home equity loan with bad credit can be pretty challenging, but there are ways. Hard money loans are financially risky but can be the only option available to people without a financially strong co-signer available. 

The best way to secure a home equity loan is to improve your credit score first. It may take some time in order to achieve this and may be quite difficult, but it will go a long way to being helpful in the long run. The lower your credit score than the higher your interest rates will be on any loans, alongside the potential to be outright denied on an application. 

Hard money lenders are out there and willing to lend money, but this can be a risky venture and may cost a lot more money than repairing your credit will and can even end up with you losing your home.

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