Home Equity Loans for People with Poor Credit

By Lorraine Watkins
Mortgage Credit Problems Columnist

How to Start the Process of Applying for a Bad Credit Loan

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You won't know if you can get a home equity loan until you apply, so let's assume that you are going to go for it. You will want to to as efficient as possible in the application process. To this end you should:

  1. Understand what a home equity loan is and is not.

  2. Shop for rates and programs--see what's available online. Check with your current lender as well.

  3. Gather up the documents you will need.

  4. Apply to at least one lender. Applying to more than one increases your chances of approval.

  5. Consider an FHA cash out refinance as well. FHA will do a cash out loan to 85% of your home's value.

What a Home Equity Loan Is and Is Not

Understand that a home equity loan is essentially a loan to yourself. So, the more you borrow against your house, the less value your asset has. The value of homes across America has declined an average of 23 percent in the past year. This means that even if you didn't tap your equity, you may have a lot less available than you did 12 months ago.

A home equity loan is not free. Even though you are borrowing against your asset, the lender will charge interest to make cash available to you. Your house is the collateral for the loan. If you take on a home equity loan, you will need to be able to make your house payment AND your monthly home equity loan payment. Home equity loans can go to collection much faster than a regular mortgage, so be sure you can make the monthly notes before signing the final documents.

What if You Are Upside Down?

As the name implies, a home equity loan draws from the equity you have built up in your home. If you owe more on your home than it is worth, you may want to first address this issue through a loan modification or government refinance. See www.makinghomeaffordable.com to find out if you qualify.

If You Are Not Upside Down

It is quite possible to have both a bad credit score and equity in your home. You may have bad credit but live in an area that has held its home values (some very posh neighborhoods or North Dakota or Oklahoma, for example). Or, your location may have seen values decline substantially, yet you have been paying on your home long enough that the market decline did not wipe out your equity. Whatever your case may be, you will not know if you can get a home equity loan until you apply, so give it a shot; you always can (and should) turn down a loan that doesn't make good financial sense.

What's the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

There are two kinds home equity loans: a traditional home equity loan and a home equity line of credit (HELOC). One main difference between them is that the home equity loan delivers the full amount of the loan in a lump sum whereas the home equity line of credit functions as a revolving credit account. With a HELOC, instead of a lump sum payment, you receive a card or checks to access the cash.

Another big difference between a home equity loan and a home equity line of credit is how each is repaid. With a home equity loan, the interest and the payments are fixed for the term of the loan. With a HELOC, the interest rate can vary, and your monthly payment is determined by the balance owed and the variable interest.

It's Time to Get Busy

Gather all the documents you needed to apply for your home equity loan including your current mortgage statement, proof of income, and a copy of your credit report. Approach your current loan servicer, and use a loan comparison site. Run the numbers through a mortgage calculator and choose the best option available.

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