Poor Credit Reduces Ability to Qualify for Home Equity Loan

By Michele Lerner
Mortgage Credit Problems Columnist

Today, lenders have tightened their standards for home equity loans. Even bad credit mortgage lenders cannot always approve home equity loans. The best way to find out if you qualify for a bad credit mortgage is to enter your information on this page to receive quotes from lenders.

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Home Equity Loan vs. First Mortgage

There are two reasons that poor credit home loans and home equity loans have become so difficult to find. First, home values have dropped, so bad credit mortgage lenders are less likely to receive the balance due if they have to foreclose. Second, a home equity loan is the secondary or "junior" loan, so these loans are even less likely to be paid in full if the property goes to foreclosure or a short sale.

How to Qualify for Home Equity Loans

There are two determining factors which allow homeowners to qualify for home equity loans. The first consideration is the value of the property. In previous real estate markets, lenders sometimes allowed homeowners, even those who needed bad credit mortgage refinancing, to borrow as much as 125% of their home's value. Now that home prices have declined, many homeowners find themselves "underwater", owing more on the mortgage than their home is worth. These owners, regardless of their credit, are unlikely to qualify for a home equity loan.

Homeowners with significant equity in their homes, even if they need a bad credit mortgage loan, are in a better position than underwater owners. Find out if you can qualify for a home equity loan by completing the form on this page.

Some homeowners will need to take some steps before they can qualify for a bad credit mortgage.

  • First, they may need to wait until they can build their equity with rising home values and by paying down their mortgage.
  • Second, they may need to improve their credit by reducing their debt, paying bills on time, and increasing their income. Sometimes a temporary second job can add just enough income to pay off some debt or to improve cash flow.
  • Third, review their credit reports and request that old information or inaccurate information be removed from the report. Even bad credit mortgage lenders review credit reports.

Taking steps now to improve your credit will improve your chances at qualifying for a home equity loan in the future.

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