Your Chances for a Bad Credit Home Equity Loan

Bad credit home equity loans are easier to achieve than many people think. The equity in your home is the strongest asset you have to secure a loan. As such, most lenders will at least consider funding you based on the status of that equity. However, there are some problems that may affect your chances of getting a home loan based on your poor credit.

Late Mortgage Payments

Since a home equity loan is very similar to a mortgage, your home equity lender will be paying keen attention to your payments on your existing mortgage. You should have no late mortgage payments for at least two years prior to seeking a home equity loan. In general, this two-year period is enough to show you have corrected any error prior. In some states, the statute of limitations for late payments on a credit score is actually cut off at two years. This means your prior late payments will have no affect at all on your ability to get a home equity loan. Previous mortgage defaults have a much longer statute of limitations.

Mortgage Not in Good Standing

Your mortgage must be in good standing for you to be considered for the vast majority of home equity loans. If you are currently delinquent on your mortgage, or if you are nearing foreclosure, no responsible lender will issue you a further debt using the property for collateral. Your existing mortgage company may additionally block an attempt to add a lien to the home if your mortgage is not in good standing. This can be written into your mortgage contract from the beginning. If your bad credit is due to several missed mortgage payments or a delinquent mortgage, you may have to seek an alternate source for your loan collateral.

FHA Guaranteed Loans

Any mortgage guaranteed by the FHA will limit the amount of equity you can use for collateral on future loans, whether you have good credit or bad credit. The government sets standards about the amount of debt you can take outside of the mortgage to prevent loss. You may be prevented from taking any additional loan over a certain limit even if you do not plan on using your home equity as collateral.

Too Much Debt

If your bad credit is a reflection of the fact you are currently holding too much debt, then you will have a hard time getting an additional loan. Home equity lenders are particularly wary of this issue because of their subordinate status. If you do declare bankruptcy, your home equity lender will be lower on the list to collect payments than senior lenders. To secure a loan, you will need to show a relatively small amount of debt in comparison to your income. Pay down your credit cards to a balance lower than 10%. Pay off any installment debts possible prior to seeking the home equity loan. Thankfully, these steps will also increase your credit score, meaning you will eventually get a home equity loan at a much better rate.

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