You want to stay in your home but you’re facing a bit of a financial set back at the moment that has damaged your credit. You may have piling medical bills. Maybe it was an unexpected job loss. Or a divorce. Whatever your situation, there are hundreds of reasons Utah home owners may want to stay in their home while still wanting to access their home equity. The problem though is how do you access home equity with bad credit?
Pulling out equity from your home with a low credit score is limited but not impossible. Traditional methods of tapping into home equity aren’t necessarily shut off if your credit is less than stellar. But you may find them subject to modifications and restrictions which prohibit accessing your ideal home equity amount. After all, your credit dictates your borrowing ability; even if your current rating was the result of circumstances, not your own carelessness. Luckily, there are methods of working around these limitations which can help you access the equity you need. There is hope!
How To Access Home Equity With Bad Credit
According to a recent study from real estate analytical firm Black Knight, U.S. consumers have some $6 trillion in available home equity they have yet to tap—nearly three times as much in comparison to 2012. So why aren’t they accessing it? More importantly, why aren’t you?
One reason is high interest rates. Remember that Utah follows the same trends as the rest of the nation. Recent estimates have placed the average interest rate for a home equity line of credit for individuals with a decent credit score (740 or above) at being roughly 5.75% APR. That’s for good credit. With bad credit, you can expect an interest rate of roughly 10.08%. And while many lenders may extend the amount of credit borrowed against your home up to approximately 85 percent of its value, the amount you can borrow is also dictated by your credit rating. In fact, many lenders either severely curtail the amount homeowners with bad credit can borrow or flatly refuse them altogether.
What About a Home Equity Line Of Credit (HELOC)?
Approval for a home equity line of credit (or second mortgage) will vary dramatically from lender to lender. Even in Utah, which tends to follow national standards. Typically however, the average qualifying minimum for a home equity line of credit can include:
- A debt-to-income ratio of 43 percent or less
- A credit rating of at least 620 (and preferably higher)
- A home value of at least 20 percent more than any debt you currently owe
If you think this sounds like a balancing act, it is. Lenders are notoriously fickle about specifications for second mortgages—even with good credit. And while you may wind up meeting the above bare minimum, approval is not guaranteed. Nor is your borrowing limit.
Obtaining a Secured Loan With Bad Credit
Depending on the amount you currently have invested in savings, you may be able to qualify for a secured loan through a traditional lender. While these can sometimes have the advantage of a lower interest rate than home equity lines of credit, there can also be certain disadvantages.
For one, you’re still committing to a long term fixed payment; and given the severity of your circumstances, this is not necessarily going to be a realistic option for many of you (particularly in cases larger expenses.) But also keep in mind that these can only sometimes have lower interest rates. A general rule to keep in mind with any lender is that the lower your credit score, the higher your interest rate will be. And if your credit is hovering in the 620 – 690 range, you’ll likely find interest rates to be even higher than with a home equity line of credit.
If you’ve had a previous lien placed on your property, your chances of finding a secured loan will be slim at best even if you managed to have it lifted. Lenders are taking a gamble when securing loans for homeowners who have faced the threat of foreclosure. More often than not, they’re not willing to take similar risks in the future. Even though it might seem to be in their benefit to sell a property, the return usually winds up being drastically less than the initial refinancing.
Alternative Lenders – Peer to Peer Lending
There’s been a surge in the visibility of alternative lenders over the past fifteen years, particularly since traditional resources such as banks and mortgage financing providers are growing increasingly more inflexible in approval rates. The actual definition of alternative lending is extremely loose, but for the sake of convenience think of them as any lending institution outside of a full scale FDIC-approved financial institution. And while the definition is broad and encompasses anything from instant payday loan providers to well established lenders such as Lending Tree, Kabbage and loanDepot, the question is are they the right choice for a second mortgage?
For many homeowners with bad credit, it can seem like an ideal choice. There’s a much higher chance of approval and sometimes, even more competitive interest rates. But there’s still the risk of foreclosure. Legally, even non-bank entities have the right to foreclose—even in instances of a second mortgage. You’re still offering your property as an asset. And neither home equity lending ability nor approval is guaranteed (particularly with lower value homes.) More importantly, many are fly by night scams; particularly ones which charge fees for pre-approval. Remember, they’re not always FDIC-approved. Practices can be entirely mercenary. When in doubt, review their accreditation and certification. If something seems suspicious, more frequently than not your fears are entirely justified.
3 Alternatives To Traditional Lending Institutions
You’re not alone if you’d prefer not to wait for approval or pay exorbitant interest rates. There is good news however for homeowners wanting to stay in their home while trying to access equity with bad credit. Consider…
1- Finding A Trusted Credit Partner
The key word here is “trust.” If your credit score is preventing you from finding a qualified lender to help you access your home equity for any reason you could have a friend help you. It’s best to have a real estate professionally work with you if you were to walk down this path. It is however a very viable solution to help you stay in your home and still access the funds you need to help you get back on your feet financially.
Though it may seem like a long shot to rely on crowdfunding via platforms such as GoFundMe or Kickstarter to help raise funds for a down payment on a second mortgage is also possible. With a little persuasive sales skills & marketing you could find a number of people willing to donate to your cause!
While crowdfunding is not usually going to give you a huge influx of funds to stop creditor harassment it can add up. If your situation and story is compelling enough you could however raise the donated funds in a matter of days or weeks. You never know until you try.
3- Go With Your Trusted Local House Buyer
The two previous options of accessing your equity, while creative and viable, might be just too much for you to take on and implement at this time. If that is the case reach out to us here at Gary Buys Houses. We are you local, Utah house buying company who you can trust to work out the right thing with you. We’re not just in the business of buying houses. We can also help you with refinancing your home equity, as well. We know how hard it can be to borrow equity with bad credit. That’s why we established our Sell Now Move Later program. We created that program for the purpose of helping people in your exact situation. If you are in a financial rut and want to stay in your home we can help. Despite having bad credit we can make the whole process very simply and fair to you. We’ve helped hundreds of homeowners find an ideal solution to equity access dilemmas over the years. Why not let us help you as well? Contact us here.