At the height of the housing boom, mortgage lenders willingly approved home-equity loans and home-equity lines of credit to homeowners regardless of whether they needed bad-credit loans because of the universal confidence that home prices would continue to rise forever. After the housing debacle, as lenders and homeowners watched home values plummet, lending standards became much less lenient. Today, even bad credit mortgage lenders rarely approve a home-equity loan unless the borrowers have 20 percent or more in home equity. In addition, you will need to prove you can repay the loan by providing detailed financial information and your credit history.

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Home-equity loan requirements

A home-equity loan is based on two important but separate factors: your financial ability to pay the loan and your home's value. A mortgage lender will usually require an appraisal for a home-equity loan, but you can also get an estimate of your home's value from a realtor.

On the financial side, your lender will generally require:

  • Two years of W2 forms
  • Two years of federal income tax returns
  • Two or three months of bank statements
  • Two or three recent pay stubs
  • Proof of any investment income
  • Proof of other income such as Social Security benefits

In addition, your lender may ask for other documentation and will check your credit history and credit score.

The role credit plays

Home-equity loans generally have a higher interest rate than a first mortgage, but those interest rates are usually significantly lower than credit card interest rates. Your interest rate will be based on your credit score. According to FICO, if you have a credit score of 740 or higher, a typical credit score on December 14, 2012, for a $50,000 home-equity loan to be repaid over 15 years would be 6.335 percent. However, if your credit score is between 620 and 639, you could pay an interest rate as high as 10.660 percent. The monthly payment on the $50,000 loan would jump from $431 to $558.

Even at a higher interest rate, poor credit home loans can be a way to pay off higher interest credit-card debt. Not only is the interest rate lower, but you may be able to deduct your bad credit mortgage interest payments from your taxes. But remember the risk you take in shifting your debt problems to your home equity: If you cannot make the payments, you could lose your home in a foreclosure.

You can find a lender to consult by completing the information on this page.