Home equity loans are a great lending option for homeowners because you can use the equity built up in your home to fund a renovation, pay debt or even to purchase other property. The longer you’ve owned your home means there is more equity you’ve accumulated that you can tap into. In Ontario, you can access up to 85% of the value of your home that you can use towards achieving your financial goals.
If you find yourself in need of a home equity loan, but have bad credit, you can still qualify for a loan. In many cases, it is easier to qualify for a home equity loan rather than a personal loan because the home equity loan is considered a ‘secured loan’ that uses your home as collateral. It provides the lender ‘security’ in case you default on the loan; hence it is usually easier to obtain. We’ve outlined everything you need to know about applying for a home equity loan with bad credit.
Obtaining a Loan with Bad Credit – The Basics
Essentially, a credit rating is designed to show future lenders how likely you are to repay your debts. A credit bureau will assign a score between 300 and 900 based on your borrowing history and lenders can access this score to determine how qualified you are for a loan. A credit score takes into consideration your payment history, the amount owed, the length of credit history, if there is any new credit and the overall credit mix.
Most of us do our best to pay our bills on time every month and when your income exceeds expenditures, this is easy to do. However, those unfortunate enough to have fallen on hard times and have lost their job, have a harder time making ends meet. Consequently, they also have more difficulty accessing funds compared to those who are financially comfortable.
The inability to access affordable credit with a poor score can make an otherwise straightforward application process all the more complicated. The good news is that even if you have bad credit, you can still apply for a home equity loan to borrow the funds you need.
Why Your Home Equity Is The Best Borrowing Option
A home equity loan is the most practical borrowing solution because it is considered a secured rather than unsecured debt which means borrowing against an already existing asset.
A home equity loan is the most common form of secured debt available to homeowners. Home equity loans are also sometimes referred to as a second mortgage loan due to the fact that they function as an additional mortgage.
These loans are one of the best ways to secure the credit necessary to cover everything from emergency repairs to debt consolidation loans. The interest rate on a home equity loan will be higher than the original mortgage, but still significantly lower than other types of loans available to people with bad credit.
Home Equity Loans vs HELOCs?
Home equity loans and home equity lines of credit are loans secured using the borrower’s home value. Anyone who has equity built up in their home can apply for a home equity loan or HELOC. Home equity loans provide the borrower a lump sum that must be paid off in monthly payments over a set term or date. Home equity lines of credit are set up similarly to a regular line of credit in that there is a set credit limit and the homeowner can access the funds whenever necessary.
Steps You Can Take To Prepare
There are some simple steps you can take to get prepared before you apply. This will help streamline your application process and get you approved much faster.
1. Gather All Your Financial Documents
Create a file of all your income statements, investments and a list of all outstanding debts. The lender will be most interested in seeing your level of income because that will determine how likely you will be at repaying the loan.
2. Estimate How Much You Need To Borrow
How much you need to borrow will hinge on what you need the money for. Consider what you will be doing with money. Are you trying to consolidate debt? Do you need to fund a major renovation project? Don’t be tempted to overspend by using all your available home equity, only consider what you absolutely need.
3. Be Knowledgeable About Your Credit Score
It’s always a good idea to know exactly where you stand with your credit score. The score will determine the stipulations placed on the loan and the overall conditions of the term, interest rate etc. Do your research ahead of time so you know the status of your current situation.
4. Consider A Subprime Mortgage Broker
In many cases, people who have damaged credit, will have an easier time getting qualified for a home equity loan through a subprime mortgage broker. They specialize in dealing with complex applications such as those with little to no income and bruised credit. They can offer reasonable interest rates and are available specifically for anyone who has been denied by the bank or another lending institution. If you have nowhere left to turn, this will be your best option.
Essentially, a home equity loan is a great way to convert the equity you’ve built up in your home into cash. If you are using the funds to improve your home by taking on a renovation or major home repair, it will only benefit you in the long-term because it will help increase the value of your home.
Conversely, if you find yourself in the unfortunate situation of losing your job and are behind on debt payments, accessing the equity in your home might be the best option to help get you back on track financially and help rebuild your credit.
If you are considering a home equity loan and aren’t sure how to get started, contact us today and speak with one of our experts. It might be the best financial decision you’ll ever make.
