Worried you wouldn’t qualify for a loan based on your credit score? There are other options too.
Most people aren’t able to qualify for personal loans for a couple of reasons, and the biggest one of those is a poor credit rating. But that doesn’t stop people from getting loans- there are several other ways for people to get loans and get ahead of their expenses.
One way of getting a loan is against the equity of your home. This is an ideal way of getting a loan, especially for people with a poor credit rating.
Table of Contents
- 1 What is a Home Equity Loan?
- 2 Subprime Home Equity Loans
- 3 How to avoid defaulting on a Subprime Home Equity Loan?
- 4 Minimum Credit Score for Home Equity Loan
- 5 Easy Loan to get with Bad Credit
- 6 Guaranteed Home Equity Loan For Bad Credit
- 7 How to get Equity out of your Home with Bad Credit
- 8 How to Qualify for a Home Equity Loan with Bad Credit
- 9 How to get a HELOC with Bad Credit
- 10 Can I get a Home Equity Loan with a 500 Credit Score?
- 11 Conclusion
What is a Home Equity Loan?
A home equity loan is a type of secured loan granted against the equity of your home, where the house is set as collateral. When lenders know that your house is set up as collateral, it offers them some security- peace of mind really- that their money will not go to waste in case the borrower defaults.
Subprime Home Equity Loans
A subprime loan is a type of loan given out to people, especially borrowers with low credit. Many mortgage lenders reject people that have low credit ratings, because of their potential inability to repay the loan. This is also why the interest rate is relatively higher for such loans.
There is a prime interest rate that is set for prime buyers with a reasonable credit rating, currently the prime interest rate is 3.25%, but the subprime interest rate is always higher. This is due to the risk of the low-credit borrower to end up defaulting on the loan altogether.
When the borrower enters the mortgage market, they are looking for lenders to lend them money for their homes. And because of a low-credit rating, they’re often having a hard time looking for lenders. Now with the subprime loan, borrowers are not in much of a fix.
That being said, the lender accepts the risk of the borrower turning into a bad debt; meaning he wouldn’t be able to pay. To save the lender from a greater loss, he charges a very high amount of interest rate from the borrower on the mortgage.
These high interest rates on subprime loans can translate into thousands of dollars in additional interest payments over the life of a mortgage.
Types of Subprime Loans
As discussed above, subprime loans are granted to high-risk borrowers, and even though the most popular thing about subprime loans is having it for mortgages, they aren’t the only reasons why people need it.
Apart from mortgages, subprime loans are granted in the shape of student loans, credit card debts and car loans too. Here are some of the types of subprime loans:
Interest-only loan: This type of loan allows mortgage borrowers to only pay the interest in the beginning of the loan duration making it affordable for them to repay during the initial months. But soon enough the amount increases because the interest is added to the loan itself. If it is a mortgage loan and the market itself isn’t performing too well, you could be stuck in a huge problem.
Adjustable-rate loan: With this kind of subprime loan type, the interest rate remains flat for the first couple of years before changing to a floating rate later on. So if the loan is for 20 years, you can expect to pay a flat interest rate in the first 2-3 years before it picks up its pace.
Fixed-Rate Loan: A fixed-rate loan is the one where the interest rate is fixed throughout the duration, like the name suggests. But with this the drawback is that the duration of the loan is relatively higher. A prime loan has a maximum limit of up to 30 years, but with a fixed-rate option it could easily be 40-50 years.
Dignity Loan: In a dignity subprime loan, the borrower must put down a down payment equivalent to about 10% of the loan and agree to a higher interest rate for the initial portion of the loan. If monthly payments are made on time for this period- usually 5 years, the interest rate decreases down to the prime rate. In addition, the amount already paid on interest will go toward reducing the balance of that loan.
How to avoid defaulting on a Subprime Home Equity Loan?
Even if you’re not a high-risk borrower on your own fault, there are chances that you default on the subprime home equity loan because of higher interest rates. Here’s how you can avoid getting to that stage of default:
- Budget your income to include the potential loan payment.
- Check your credit score and fix errors in your credit history.
- Make timely payments each month to improve your credit rating.
- Shop around for alternative lenders.
- Consider asking someone with strong credit and income to cosign on the loan.
- Set a reminder at least 3-4 days prior to the due date so that you don’t forget paying, and if you’re short of money, you have time to ask from your friends or family.
Minimum Credit Score for Home Equity Loan
To qualify for a home equity loan, a borrower must at least have a credit score of 680. This is just the minimum threshold that is required; let’s get into details of credit score and what is considered good.
Most credit scoring systems use a scale that ranges from 300 to 850. There are, however, some credit scoring models that go up to 900 or 950, including industry-specific scores used by certain institutions.
So the highest score that you can go up to is 850. However, it is not necessary for you to exhaust yourself into reaching that 850. Any score in late 700s to early 800s is great! You are good to go with proceeding with that loan!
This is the average breakdown to be mindful of:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
FICO uses percentages to indicate the importance of each factor to your credit scores.
|Length of credit history||15%|
Easy Loan to get with Bad Credit
FHA loans, as opposed to conventional loans, are very popular in the mortgage market. They are backed by the federal government, meaning the government gives lenders some guarantee on the loan, making it easier for lenders to trust the borrower.
The lender or banks who give out these mortgages are backed by FHA, which is why they have a downpayment as low as 3.5%. This is what gives lenders an edge even if the borrower defaults on the loan.
As compared to a conventional loan, the interest rates of FHA loans are relatively low because of their backing from the FHA. The interest rate today is 2.81% as compared to the interest rate of conventional loans which is 2.99%.
Essentially, there are 5 types of FHA loans:
|FHA LOAN TYPE||WHAT IT IS|
|Traditional Mortgage||A mortgage used to finance a primary residence|
|A reverse mortgage that allows homeowners aged 62+ to exchange home equity for cash|
|A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills|
|A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills|
|Section 245(a) Loan||A Graduated Payment Mortgage (GPM) with lower initial monthly payments that gradually increase (used when income is expected to rise), and a Growing Equity Mortgage (GEM) where scheduled increases in monthly principal payments result in shorter loan terms.
FHA Loan Requirements
Even though it may seem that it is relatively easier for a borrower to obtain an FHA loan, there are certain requirements that set the bar for applicants. Here is what you need to know.
Credit Score and Downpayment: Just like any other loan, an FHA loan is also heavily dependent on the credit rating of the borrower. It should be at least 500-579, that is when you get a downpayment of 10%. But if your score is 580+, you could be eligible for only a 3.5% down payment rate. It all comes down to this: having a higher credit score will get you a good deal.
Debt-to-income ratio: A DTI is a measurement metric that simply evaluates how much debt you have against your current income. More DTI will reduce your chances of being qualified. The DTI should not be more than 50%, and you’re in the safe zone if it is below 43%.
Primary residence: One of the requirements for an FHA loan is that the property should be the primary residence of the borrower, and that it should meet the minimum criteria of FHA property requirement.
Proof of employment: The borrower needs to prove that he is employed and has a steady source of income to be able to pay for the mortgage loan. This is not a very hard requirement to fulfil though, because most people look for mortgages while they already have a steady income from their employment.
Guaranteed Home Equity Loan For Bad Credit
Even for a person with a poor credit rating, there are certain guaranteed home equity loans for bad credit.
|Lender||Best For:||Min. Credit Score||Est. Apr||Min. Loan Amount||Max. Loan Amount|
|Bad Credit Loans||Poor credit scores||Not specified||5.99%–35.99%||Not specified||$10,000|
|Upstart||Limited credit history||600||8.69%–35.99%||$1,000||$50,000|
|OneMain Financial||Secured loans||Not specified||18.00%–35.99%||$1,500||$20,000|
|TD Bank||Low rate caps||Not specified||6.99%-21.9%||$2,000||$50,000|
|Avant||Range of repayment options||580*||9.95%–35.99%||$2,000||$35,000|
|Upgrade||Fast funding||620||7.99%–35.97% (with autopay)||$1,000||$35,000|
Note: Sample rates have been extracted online, courtesy of BankRate.
How to get Equity out of your Home with Bad Credit
If you have bad credit, you may still be able to get equity out of your home through a home equity loan or line of credit. These types of loans are typically available through private lenders, and they use your home’s equity as collateral. This means that if you default on the loan, the lender could foreclose on your home.
How to Qualify for a Home Equity Loan with Bad Credit
Bad credit is one of the main reasons why homeowners face difficulties when trying to qualify for a home equity loan. However, it is still possible to obtain this type of financing by following a few simple steps.
First, contact your local banks and credit unions to inquire about their home equity loan requirements. Many financial institutions are willing to work with homeowners who have bad credit, so it is important to ask about your options.
Second, order a copy of your credit report from all three major credit reporting agencies. This will give you an idea of where your credit stands and what type of home equity loan you may qualify for.
Third, work with a reputable home equity loan broker. A broker can help you find lenders who are willing to work with borrowers with bad credit.
Fourth, improve your credit score by paying down your debts and maintaining a good payment history. This will make it easier to qualify for a home equity loan in the future.
Fifth, consider a secured home equity loan. This type of loan requires collateral, such as a home or vehicle, to be used as security for the loan.
By following these steps, you can increase your chances of qualifying for a home equity loan with bad credit. Remember, it is important to shop around and compare offers from multiple lenders before choosing a loan. This will help you get the best rates and terms possible.
How to get a HELOC with Bad Credit
Bad credit can make it difficult to get a home equity line of credit, but there are ways to improve your chances. One option is to work with a co-signer who has good credit. Another is to look for lenders who specialize in bad credit HELOCs. You may also be able to improve your credit score by paying down debts and maintaining a good payment history.
Can I get a Home Equity Loan with a 500 Credit Score?
It is possible to get a home equity loan with a 500 credit score, although not all lenders will approve such a loan. In order to increase the chances of approval, it may be necessary to provide additional documentation or collateral. Additionally, borrowers with lower credit scores may be required to pay higher interest rates.
To benefit high-risk borrowers with a low credit rating, certain loans like subprime loans are made common in the country but they are often with a very high interest rate. Of course there is a chance of the borrower defaulting on it too because of the interest rate, but that’s a risk the lender has to take.
Make sure you know exactly what you’re getting yourself into; check out market rates, talk to several lenders before you make a decision. It is obviously advisable for you to fix your credit ratings before applying for a subprime loan, because this way you will dodge high interest rates.
It depends on borrowers and their needs of when to opt for a subprime home equity loan.