Home equity loans when you have bad credit

By Michele Lerner
Mortgage Credit Problems Columnist

The tumbling values of homes around the country have left many homeowners with less equity in their homes than they think they have. If you are thinking of applying for a home equity loan, first get an idea of what your home is worth in today's market. Most lenders limit home equity loans to a combined loan-to-value (including the first mortgage) of 75 percent to 80 percent.

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While having equity is important, homeowners also need to meet the lender's credit standards. Homeowners with credit problems may need to look for poor credit home loans.

Home equity loan or home equity line of credit

If you are tapping your home equity, you need to decide if you would like a home equity loan or a home equity line of credit.

If your goal is to pay off high-interest credit card debt, a home equity loan -- which delivers a lump sum that you pay back with regular monthly payments -- might be your best option. Not only can you improve your credit score by reducing your debt, but your new payments for the home equity loan can be much lower than your payments to other creditors. In most cases, the interest you pay on the home equity loan is tax-deductible.

A home equity line of credit is a revolving line of credit that you use, pay, and reuse as you need the funds. This structure tends to work better for ongoing home improvement projects or to pay for recurring expenses, such as annual college tuition bills.

Bad credit loans

If your credit score is low, you may need to contact a bad credit mortgage lender in order to obtain a home equity loan. However, it may be impossible to obtain a home equity loan from bad credit mortgage lenders. A home equity loan is a subordinate loan -- meaning that it's a loan that will be paid only after the first mortgage has been paid when the home is sold. Borrowers with poor credit are considered high-risk, so the possibility of these borrowers defaulting is even higher. Lenders are therefore more cautious about qualifying bad credit borrowers for home equity loans.

If you are not sure where you stand in terms of your home equity or your credit, fill out the form on this website to see if a lender will qualify you for a home equity loan. If not, a little bit of time and some work at improving your credit could make this an option in the future.

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