There are a wide range of reasons you may be interested in a home equity loan. Perhaps you want to consolidate your debt, fund a home renovation or help your children pay for their education. If you are interested in tapping into the value of your biggest asset, you are not alone—home equity loans are a popular choice for many Canadians.
The trouble is, securing these loans can be a challenge if you are self-employed, have no proof of income or have blemishes on your credit rating. In this case, you may find it hard to find support from your bank or other mortgage lenders.
If you’ve been wondering how to get a home equity loan with bad credit, we’ve put together a list of ideas to get you started. You may have more options than you think!
1. Stay Hopeful about Your Bad Credit
If you are afraid of being turned away by banks, credit unions or other traditional lenders, remember that you are more likely to be approved for a home equity loan than you are for a traditional bank loan. This is due to the collateral you have on the line.
Essentially, the value of your home acts as security for your loan, making you less risky in a lender’s view. This will make it easier for you to obtain a home equity line of credit.
2. Know Your Bad Credit
Another way on how to get a home equity loan with bad credit is to make sure you have a good handle on your numbers. What is the approximate value of your home? How much is your current mortgage payment every month? What is the total value of any other debt?
Being prepared will speed the process and will prevent you from feeling put on the spot, without the information you need to move forward.
3. Get Familiar with Home Equity
One number you will want to understand inside and out is the amount of equity you have in your home. This number will help determine your risk level and, in turn, the interest rate you are offered. If, for example, your home is worth $500,000 and you have a remaining mortgage of $200,000—the amount still owing—you have paid off $300,000. This is the equity you have in your home.
4. Understand Fixed Rate Term Loans
Another thing to have clear in your mind is the purpose of the funds you would like to borrow. If you know you need a fixed amount in a lump sum, perhaps to pay off your debt or pay for a home renovation, you will want to ask about a fixed rate home equity loan. These products are generally easier to qualify for, given that they seldom require proof of income or credit reports; they rely almost entirely on the equity you have in your home.
5. Think About a Home Equity Line of Credit (HELOC)
If your cash needs are ongoing and you’d like recurring access to money, you may want to look into a home equity line of credit, which acts more like a credit card than a straight-forward loan. The process for applying for this type of loan is somewhat more involved than a fixed-rate loan; you may be required to provide a credit score and proof of income. To improve the odds that you’ll qualify for this kind of loan, look for a broker who specializes in this area.
6. Research Your Options
Even if you are turned away by your bank or traditional lender, there are plenty of alternative solutions for a home equity loan. Smaller lenders might provide you with more personalized service, a quick return on your request and a good overall experience. Keep in mind, however, with spotty credit, you may be subject to higher interest rates. Be sure to ask openly about interest rates so you can make fair comparisons.
7. Be Open
No matter whether you decide to go with a bank or a smaller lender for your home equity loan, make sure that you are open about your financial status. If you have unreported debt or reasons you know you may be at risk for late or missed payments, paint as full a picture of your financial status as possible. Hiding debt or running into income gaps will only hurt you later.
8. Stay at It
Once you’ve had a chance to prepare for your loan application and hear the results, stay open to future opportunities. A ‘no’ from a bank or credit union does not mean you won’t find a lender willing to help you meet your financial goals. Perseverance and patience will serve you well as you search for the right provider for your home equity loan.
The motivation for a home equity loan can range from a home-related project to avoiding power of sale on your property. Whatever your interest in this financial tool, you want to make sure you are as prepared for the application process as possible. If you’ve had credit mishaps in the past, you may be wondering how to get a home equity loan with bad credit. We hope these ideas have given you hope and a few ways to prepare for your home equity loan application.