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Getting a Home Equity Loan with Bad Credit

For people that want to use money built up in the home, otherwise known as equity, a home equity loan is a great solution. With the money, the individual would have the freedom to spend the money in whatever way deemed appropriate, whether to buy or repair a car, perform home improvement, go on vacation, pay off bills, and so on. However, people with bad credit, even though they might have significant equity, would find that getting an equity loan could be tough.

The first thing would be for the homeowner to sit down with a reputable lender to talk about the various possibilities of securing a home equity loan. As a part of the loan process, the individual’s credit reports would be run from all three credit bureaus. Based on the information discovered, the lender would be able to approve the loan or would have to deny it. For the person with bad credit, knowing money is available in the home but not having access to it is frustrating.

Securing a home equity loan while having bad credit is challenging but not impossible. By taking the right steps, this person could increase his or her chance of getting the loan. For one thing, investing in a home appraisal would be to the benefit of the homeowner. With this, the current value of the property would be determined. This way, a lender for a home equity loan might take the value of what the home is worth, the amount owed, and then determine that a home equity loan would be possible.

As an example, if a person had a $200,000 home with $60,000 built up in equity, and that person wanted to take $50,000 out in a home equity loan but had bad credit, the appraisal might help. In this case, if the appraisal showed that the home was worth $200,000 or more, the lender might offer to loan the person $25,000 rather than the full $50,000. The reason is that if for some reason the loan were defaulted on, there would be enough money left in equity to cover the balance of the loan.

One of the benefits of taking out a home equity loan over a second mortgage or even refinancing the initial loan is that the borrower would not be required to pay points, which are lender fees often associated with mortgage loans. Simply put, a single point is equal to 1% of the amount of money being lent. Therefore, if $50,000 were being borrowed on a refinance or second mortgage loan, the person would pay $500. However, in the case of a home equity loan, these fees are void.

One of the best ways of securing a home equity loan but having bad credit would be for the person to sit down and talk to the mortgage company that has the first mortgage loan. While there would be no guarantee, this lender would be more apt to offer the loan over any other lender. However, even if the first mortgage lender offers to secure this type of loan, it would be in the borrower’s best interest to compare options and interest rates with a number of lenders.

If the person’s credit is seriously bad, then there are a number of ways to begin rebuilding. This might mean putting the home equity loan on the back burner for a short time but by doing this, it would be beneficial to the individual. The reason is that people with bad credit typically pay higher interest rates than those with good credit. Therefore, waiting six months to a year to get the credit history in better shape might be a consideration.

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