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How Do I Apply for a Home Equity Line of Credit With Bad Credit?
Home equity lines of credit can help homeowners with bad credit.
Bad credit is crippling when you seek any loan, especially a home equity line of credit (HELOC). Lenders want high creditworthiness for these loans because they have fluctuating interest rates and high potential balances that sit in a second position to first mortgages. If borrowers default and the home goes into foreclosure, the second lien is only paid after the first – if there is any money left. Review the credit and other loan package requirements to give yourself the best chance of success when applying for a HELOC.
How Bad Is Your Credit?
We all have our own interpretation of what is considered “bad.” Industry standards describe poor and bad credit scores as under 579. While you can still be approved for a mortgage with a FICO score of 500, most lenders want FICO 620 or better for a HELOC. While this isn’t a firm requirement, it is industry standard, and you will pay a higher interest rate if you don’t meet it and are still approved for the loan.
If you are serious about getting the HELOC, obtain a copy of your credit report and assess it. Look for errors and dispute any you find. Look at credit cards you have that you don’t use or that carry high balances. Start to eliminate them by paying them down. It may take up to 12 months to resolve some items, but it is well worth it. Refrain from applying for any credit – department store cards, cars or any loans – until your credit score rises. Every hard inquiry can bring your score down five points.
Debt and Income
When you eliminate all those little monthly credit card payments, you reduce the monthly debt obligation you have. This helps with qualifying for the HELOC. Lenders look at your debt-to-income ratio (DTI). The worse your credit, the better this number should be. In ideal situations, lenders want the DTI at 40 percent or less, meaning you only pay $400 in debt bills for every $1000 of monthly income.
Income is not just your paycheck. Include all other income such as child support, spousal support, retirement benefits and disability payments. If you rent a room out in the house, keep records of the payments and include this in the DTI ratio.
Lots of Equity Needed
In ideal situations, lenders are reluctant to approve HELOCs exceeding 80 percent of the home value. With poor credit, don’t expect even this amount. The more equity you have in the home, the better your chances are of increasing the loan amount in a HELOC.
Finding a Lender
You’ll probably have to shop around to find a lender who is willing to look at the loan package. Don’t go around town completing loan applications; instead contact lenders with your credit score, income and debt verification and ask them if they will consider the package. Remember that every time a hard inquiry is pulled, your credit score goes down. Help your credit by giving lenders the overall scenario, maybe authorizing them to pull a soft credit inquiry that doesn’t hurt your credit score, and see if they can help you.
While you may find lenders online, your best bet might be local credit unions that understand the locale better than big banks and brokerages. Credit unions strive to serve their members and will look for a program to help you if they can.