How to Get a Home Equity Loan with Bad Credit

Home equity loans, often called HELOCs (Home Equity Lines of Credit), are mortgages that act as equity credit cards. These loans are often used for home improvements or large expenses, such as college tuition. While most traditional lenders require a good credit score (680 and above) for their home equity loans, it is possible to get a HELOC with bad credit. The key is minimizing the damage.

Things You'll Need

  • Current copy of credit report
  • Income documents (paychecks, W2s)

Step 1

Get a copy of your credit report from the free site in Resources. Review your report for serious delinquency, charge-offs and collection accounts. Furthermore, if you have any bankruptcies that are less than one year old, you will not be qualified with any lender.

Step 2

Bring all delinquent accounts current and pay off as much of your charged-off debt prior to applying for loans. By minimizing the damage to your credit, you are showing good faith to potential lenders.

Step 3

Find out how much equity you have in your home. Do an LTV ratio calculation. To do this, divide the total amount of mortgages on your property by the property value. For example, a home worth $400,000 that has $250,000 in mortgages has an LTV of 63 percent. The lower your LTV, the greater your chances of getting approved.

Step 4

Research bad-credit lenders. You'll need to forget about local banks and credit unions and market rates. These do not apply to you. Instead, research finance companies, including Chase Financial, Wells Fargo Financial and CitiFinancial, that cater to borrowers with less than perfect credit.

Step 5

Apply to at least five lenders. Because you have bad credit, you'll need to cast a wide net. In the application, emphasize your stronger characteristics--like a low LTV or high income--to potentially convince a loan officer or underwriter.

Step 6

Appeal any rejection. Call a loan company's manager and ask to bring the application to a higher level. Getting intimately involved in the underwriting process may pay dividends.

Step 7

Do not be afraid to say "No" to loan offers. Some lenders try to take advantage of vulnerable borrowers by charging exorbitant fees and interest rates. Only accept an offer if it is financial feasible. At the same time, though, you need to prepare yourself to face nauseatingly high interest rates and fees.

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