How to Get a Home Equity Loan with Bad Credit – Tips

How to Get a Home Equity Loan with Bad Credit – Tips

Picture it being the dead of winter, and your heater suddenly stops working. On the other end of the spectrum, perhaps your air conditioner dies in the middle of a heatwave. Or your roof collapses, and you are suddenly in need of a brand new roof.

With the number of people still affected by the recession, it is difficult to have enough money put away in savings to cover a large, unexpected home expense.

Without anyplace else to turn for money, home equity loans may save the struggling homeowner. By taking out a home equity loan, suddenly, the fraught homeowner is able to provide heat or air conditioning for his/her family at home.

What Is a Home Equity Loan?

Home equity loans are commonly known as a “second mortgage.” The equity, also known as the market value of the house and property, is used to put the house up as collateral.

The loan amount depends on the amount of equity in the house. A bank will not let you take out more than 85% of the equity in a home equity loan. The first step in taking out a home equity loan would be to get the house and property appraised.

A recent appraisal will give you and the bank the most accurate idea of how much the house is worth. For all the bank knows, you may have reworked the property and increased the property value since the last appraisal.

Why Get a Home Equity Loan?

Home equity loans are quite popular because they come with a number of advantages:

Low-interest rates
Tax-deductible interest
Easy to qualify for with bad credit

For someone that needs a big sum of money, a home equity loan is a better place to turn than a credit card. Home equity loans usually have lower interest rates than credit cards and personal loans because a home equity loan is backed by the value of the house. The bank knows that even if you are unable to pay off your home equity loan, it can recoup the cost of the loan by foreclosing on your house.

Even though these loans have low-interest rates, they will still accumulate a small amount of interest. However, any interest that accumulates is tax deductible. The low interest rate plus the tax-deductible interest is a win-win scenario!

Most importantly, homeowners with poor credit scores are able to qualify for home equity loans. Poor credit scores usually net an automatic denial when applying for credit cards and personal loans. A home equity loan is backed by the value of the house, so a bank is more lenient as to whom it hands them out.

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What Is a Credit Score?

The term “credit score” gets tossed around a lot. However, not many people know what their credit score is or how they can improve it.

A credit score is a number assigned to you based on your past credit experiences. Banks will use your credit score to determine whether they will approve your loan request. The three credit score agencies, Equifax, Experian, and TransUnion, each assign a separate credit score based on your information. You can request a copy of your credit score once a year per agency.

There are a number of ways to improve your credit score. A handful of ways to improve your credit score are to:

Pay your bills on time
Lower your debt-to-income ratio
Limit the number of “hard credit inquiries”
Extend your credit history
Open more lines of credit

Can I Get a Home Equity Loan with Bad Credit?

The simple answer to this question is, yes. Banks will give out home equity loans to people with poor credit. Banks understand that everyone goes through tough times and may not have the perfect credit score. And it is okay to admit that you are struggling! At the very least, you have the security of knowing that a home equity loan with bad credit is possible.

What banks will consider as a “bad” credit score is relative. Some banks consider anything under 700 bad while other banks may consider 600 or 550 as their cutoff. It is important to sample a variety of banks when shopping around for a loan because they all go off different criteria when evaluating your credit score. While one bank may say no to your loan application, another bank may pass you through with flying colors!

The lower your credit score, the higher your interest rate will be. Considering that home equity loans have low-interest rates to begin with, a home equity loan with bad credit may not result in an outrageous interest rate.

This is fantastic because, for instance, if someone with bad credit attempts to take out a car loan, he/she may wind up with something as high as a 22% interest rate. That tends to not happen with home equity loans.

Bad Credit Home Equity Loan Lenders

The biggest hurdle to cross when you have bad credit is finding a bank that is willing to work with you. It is best to look for home equity loans for bad credit at major banks. Big banks are more likely to give out these types of loans because they can afford to take the risk. Nationwide banks have a large number of assets, sometimes as high as $2.4 trillion dollars, and will not go bankrupt if a certain percentage of their clientele skip out on their loans.

Bad credit home equity loan lenders also come in the form of online banks. Not every large, nationwide bank will have a physical location. Some banks are operated entirely through an online webpage. This appeals to some people who do not want to leave the comfort of their own home to take out a home equity loan. However, this may bother those who like dealing face to face with an investment professional at their local bank.

Smaller banks and credit unions will usually not be the go-to bad credit home equity loan lenders. They simply lack the means to take risks on people with poor credit scores. In the smaller bank’s mind, it has a limited amount of money to work with, so it would rather dish out loans to better-qualified individuals. Everything that a bank does is based on risk/reward, and a smaller bank cannot take as many risks as a larger bank.

We have compiled two large banks – one physical and one online – that offer home equity loans for bad credit scores. They are listed in no particular order:

1. Bank of America

Bank of America is notorious for providing scores. Bank of America is a large bank with locations nationwide throughout the United States. Bank of America branches tend to be clumped in the Midwest; however, they do operate nationwide. Bank of America also has branches in 34 other countries worldwide.

The most popular home equity loan that Bank of America offers has a variable APR. What this means is the APR will stay at a low rate for 12 months, and then it will jump to a new rate for the remainder of the life of the loan. For people that know they will pay off their home equity loan within a year, this is a great option! This allows you to take advantage of a low rate before your interest rate and concurrent monthly payments spike.

Bank of America advertises a 2.240% APR for 12 months, which jumps to 3.780% after the initial 12 month period. When determining its advertised rates, Bank of America makes a couple of key assumptions. It assumes that:

You have excellent credit
The house has a 70% loan-to-value ratio
The house has no more than 4 unit owners

For people that have hit a rough patch, their scores will have a higher interest rate than what is advertised. It is hard to predict how much higher the interest rates will be because it is determined on a case-by-case basis.

It is also possible that Bank of America will forgo the initial low introductory rate if you have a low credit score. Rather than starting someone with bad credit off on a low introductory rate for 12 months, that person may have the loan at one fixed rate for the entire length of the loan.

Trying to get a through Bank of America should be an easy ordeal. It will require you to show documented proof on the value of the house before making any decisions.

Regardless of the value of the house, Bank of America will not give out a home equity loan for less than $25,000. The terms of the loan remain the same, even for individuals trying to get a home equity loan with bad credit scores. The loan is set on a 30-year repayment interval and may be paid off at any time throughout the loan.

2. Discover

Discover is an online-only banking service available in the United States. Discover is primarily known for offering the following services:

Credit cards
Student loans
Savings accounts
CD and IRA investments
Home equity loans
Personal loans

Discover is a large contender for offering people a home equity loan with bad credit scores. Due to being a nationwide online banking chain, Discover does not have to pay to upkeep physical branches. This lowers Discover’s total overhead and allows it more capital to put towards approving loans. This is why Discover would be more apt to approve a home equity loan for an individual with a poor credit score than a smaller, local bank.

Since Discover is an online bank, people have reservations about working with it. However, there is nothing to worry about when using Discover because it has personal bankers available 24/7. These personal bankers can be reached at 1-855-361-3435, and they can assist with everything from giving a quote to helping existing customers.

As with Bank of America, Discover offers the same terms for individuals seeking a home equity loan for bad credit as people seeking the same loan with good credit. Discover mandates the loan be between $25,000 to $150,000 dollars in total. Although you may not be approved for $150,000 dollars or even want $150,000 dollars, this is the upper limit to what Discover is allowed to approve.

For people seeking home equity loans for bad credit, Discover offers a worry-free approval process. The bad credit score is most likely already weighing on your mind, so Discover will take some of that stress off you. You can get approved instantly by going on the Discover website and entering in your information. It will need to know the value of your home, your credit score, and your yearly income.

Discover also offers $0 origination fees, $0 prepayment penalties, and $0 closing costs in most states. The $0 prepayment penalty is a lifesaver for people who are looking to pay off their loan sooner than 30 years. Most home equity loans are set for a 30-year repayment interval. For people getting a low home equity loan – for example, $25,000 – it can be paid off well before 30 years is up. It helps to have peace of mind knowing that you will not be charged an outrageous penalty for paying off your loan sooner.

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The $0 closing cost applies in most states except:

Alabama
Florida
Georgia
Kansas
Minnesota
Oklahoma
Tennessee
Virginia

If you live in one of the above states, you may need to plan ahead to be able to afford your closing costs. Most lenders will also allow you to work your closing costs into the cost of the overall loan.

The remaining states with $0 closing costs make out well because that means individuals do not have to pay any money out of pocket. Essentially, they are able to take out a minimum $25,000 loan with no money down.

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