Controlling Your Personal Finances While Running A Business

Home Equity Loans For Bad Credit: Are They Possible?

Getting a home equity loan is based on how much equity you currently have in your home. Many people assume that because they have spent a decade paying a mortgage they should be able to borrow a lot of money on a home equity loan. Unfortunately, that is not how a home equity loan works. There are other factors at play too, including bad credit. If you want a home equity loan and you have bad credit, you have to first understand how the process works.

How Equity Loans Normally Work

Equity is the difference between your original loan amount and the amount you currently owe on your mortgage. Many people spend the first ten years of their mortgage making interest-only payments, which means that they have NO equity as of yet. The next ten years begins pulling down the original loan amount, but most banks and credit unions will not even look at your equity for a loan until you have at least a couple grand to five thousand in equity available.

Check your mortgage balance. If it is above the amount you originally borrowed, you have less than zero equity and cannot borrow anything. If it is below your original amount, you are beginning to build equity, but probably do not have enough to make it worth a lender's while.

How Bad Credit Impacts Equity Loans

Another factor that can affect your ability to borrow on the equity in your home is your credit score. Bad credit disallows you from borrowing, even if you have a ton of equity available in your home. If your bad credit is also the result of missed or late mortgage payments, banks will write you off in a hurry.

Still, it is possible to get an equity loan. You have to have a lot of equity built up—that is the first step. Next, you have to be willing to go to non-traditional lenders who offer bad credit loans to homeowners. These are a little more difficult to find because you cannot offer up your house as collateral because it is not free and clear of a mortgage. 

Once you have found a bad credit equity lender, expect to pay really high interest or a one-time flat fee for borrowing the money. You should also be aware that the loan puts a second-party lien on your house. In the event that you default, you will have to deal with both the mortgage lender and the bad credit equity lender. If you really need money and are willing to take the risk, do it. Otherwise, consider a second mortgage loan instead.