Will Bad Credit Keep Me from Qualifying for a Home Equity Loan?
If you have built up equity in your home that you would like to pull out to fund a home improvement, pay for a wedding, consolidate debt, or even plan a Disney vacation, you will still have to go through the approval process for a home equity loan or line of credit. This would be an entirely new loan outside of your first mortgage (or even if you own free and clear). Though it is your equity that you have built up, bad credit can still be the deciding factor of whether or not this money is available for your use.
Figure Out Which Loan Meets Your Needs
The mortgage process has been described by many as one of the more stressful financial situations you can be involved in, more than even searching for a new car. Before you proceed with applying, it’s a good idea to know the difference between equity loans so you first know which meet your specific need. While each typically have more favorable rates over credit cards, a traditional home equity loan is a set amount borrowed with fixed payments made each month, as a home equity line of credit sort of works like a credit card where you have an available amount to borrow from as-needed, making payments on the balance. Visit the Home Equity Wiz blog for further clarity on the difference between a home equity loan and line of credit.
Credit Qualifications to Keep in Mind
The amount of equity you have in your home is a good starting point to see how much you can borrow, which is typically up to 80% of the home value, your credit score will be the deciding factor. Scores around 700 and above will score the most favorable rates, but lesser scores can still gain approval if debt-to-income ratios and loan-to-value of the home are both low. Each borrower is different, so if you lack in the credit department you can expect a deeper investigation of your financial picture to gain approval.
Review Your Report
While you may assume you have ‘excellent’ credit, you could be in for a shock if the lender sends you a declination letter. It’s always a good idea to review your full credit report at least once a year, which you can get for free annually from the major credit bureaus. With the frequency that fraud seems to occur on accounts these days, checking your report will ensure that all account information is accurate and up to date. You can avoid the additional fee to see your credit score, as scores are now included on monthly credit card statements.
How You can Improve Your Score
Two of the largest pieces that make up your credit score are the payment history and amount of debt you have incurred. While being even a day late may cause a late fee or a bump in interest rate, it’s when you reach thirty days late that you could damage your score for years, whether it was an accident or not. While paying your bills on time are important, it’s also the amount of debt you’re carrying that is just as important of a factor. The more credit utilization is used up as your balance approaches the available credit, the more of a drop you’ll notice.