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Home equity loans can help you unlock additional value in your home. By borrowing money on your property, you can finance home repairs and renovations, which can increase its value. You can also use the money to deal with financial emergencies or even to pay off debt.

That’s because home equity loans and home equity lines of credit – the two most common forms of borrowing against a home – tend to have much lower interest rates than unsecured debt. real estate, like credit cards.

“Using a relatively low interest rate loan, especially if it’s to cover the cost of a renovation or major home improvement, could be a smart financial decision,” Elliot Pepper told us, CPA, CFP and co-founder of Northbrook Financial.

But being a homeowner is not the only requirement for borrowing against real estate.

First of all, you must have what the name of these loans implies: home equity. You borrow against the value of the interest you hold in your property, which is the equity in your home. So you have to pay less on your mortgage than the value of the house. If your home is valued at $ 300,000 and you owe $ 100,000 on the mortgage, you have $ 200,000 in equity.

The higher the equity in your home, the more money you’ll be able to borrow, all other factors being equal – up to one. maximum 85%. This amount is determined by factors such as your income and creditworthiness, as well as the value of the property.

Second, that creditworthiness, as expressed by your credit score, and your income must be sufficient for a lender to decide that you can borrow money responsibly. The minimum credit score required to apply for a home equity loan is 620 for most lenders; you will see the best interest rates above 720.

How your credit score plays a role in getting a home equity loan

You need to familiarize yourself with credit score ranges in order to see where you are at:

Credit score ranges

Credit score Credit rating
300-579 Very poor
580-669 Fair
670-739 Good
740-799 Very well
800-850 Exceptional
Source: Experiential

Below 720, you’ll likely still qualify for a home equity loan or be able to refinance an existing loan, says Travis Tracy, a certified financial planner at Fortitude Financial Planning. But once your credit score drops below that threshold, things start to look a little darker.

Can You Get A Home Equity Loan With Bad Credit? And, should you?

What to do if you have bad credit

“If you are considering getting a home equity loan and have at least the 15-20% equity required, but your credit is bad, you need to take steps to improve your credit score first. credit, ”says Lindsay Martinez, owner and financial planner at Xennial. Planning.

She recommends downloading your credit reports from each of the three major agencies – Equifax, Transunion, and Experian – and making sure there aren’t any inaccuracies that could negatively affect your score. If there are any, she suggests taking immediate steps to dispute them with the credit bureau and correct them. (A credit report is not a credit score; they are different things, although the former influences the latter, which is available for free on many online credit card accounts.)

“Sometimes the things that you rectified have not yet fallen on your report, so it can impact your score,” says Tracy. You can get a free copy of your reports from each of the three agencies, once a year, at annualcreditreport.com.

It’s also a good idea to take a look at your budget and spending habits.

Not paying off your credit card balance in full each month will increase your credit usage rate, which in turn will lower your score. Getting to the root of the problem can help narrow down any steps you might want to take to rectify it.

Martinez also advises against requesting additional credit, as each request will result in a temporary impact of a few points on your score or the absence of any debt payments. Missing bill payments will also negatively affect your credit.

“Having a steady job for many years and / or a high income can increase your chances” of getting approved for a home equity loan with low credit, says Martinez. High income can also improve your debt-to-income ratio, which most lenders like to see below 43%, she says.

If you want to continue, Tracy recommends checking with your current lender to see if they would be willing to work with you. Already having a mortgage that you pay on time may suggest to the bank that you are a trustworthy borrower.

Whatever you choose to do, there’s one thing experts strongly advise against: using home equity to fund personal expenses, like a vacation or a new luxury car.

To borrow against one’s residence is to put it as security; if you stop paying the lender, that residence can be foreclosed. Taking this risk to finance personal expenses is not a smart financial decision.

Final result

Getting a home equity loan with bad credit is difficult, but not impossible. Having a low debt-to-debt ratio and a solid work history can help offset a low credit rating in the eyes of a potential lender.

But what you want to ask yourself is if you need this loan now. Credit scores aren’t fixed, so the best course of action might be to reassess your spending habits and wait until you can increase your credit score. This will not only help you get the loan but also get it at a much better rate of interest.


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