The housing crisis of the last few years has put a damper on the number of home equity loans that are approved. This fact does not mean that it is impossible to get a home equity line of credit, but it does make it a little more difficult. If you have poor credit, you could wind up having to pay much higher fees or interest rates than you would have paid had you possessed higher credit scores. In some cases, you might be declined for the loan altogether. Understanding what lenders look for this type of loan will help you decide whether or not you would be a good candidate.
HELOCSs are High Risk Loans
Most home equity loans are a line of credit, which pose an imminent danger to banks. The ability to max out your credit line, thereby maxing out the LTV of your home is a danger for the bank that holds the second lien on your home. Unlike the first mortgage, the second mortgage very rarely gets paid in the event of a foreclosure. This means that the bank could lose thousands of dollars on your loan alone, not to mention the hundreds of thousands of other loans that could potentially default. This factor alone has made banks tighten their restrictions on this type of loan.
Assessing your Credit
If you are able to pull your credit report prior to applying for a HELOC, you will be able to tell what a lender might think. Of course, the credit score is not the only thing that is evaluated when determining whether or not you should be approved for a home equity loan, but it is very important. In general, the minimum FICO score allowed for a second mortgage is 620, with a few lenders making exceptions to that rule. If you find that your FICO score is below that, it is time to assess what is causing the damage and fix it. A few of the most common issues include:
- Credit lines that are maxed out
- Late payments
- An abundance of collections
Making your FICO Score Higher
Raising your credit score takes time; it will not happen overnight. You should start by determining what could be causing your low score. If it is credit lines that are maxed out, start paying the balances down as much as possible. It is best if the maximum amount of credit that is outstanding on each card is less than 30 percent of the maximum credit line. This shows responsible use of your available credit and helps your credit score to increase. If you have an abundance of late payments, start making your payments on time, if not early. The more payments that you make on-time, the higher that your credit score will rise, allowing you more opportunities for a home equity loan. If you have a series of collections, try to get them settled and then wait a few months to see how it affects your score.
Determine the Equity Available in your Home
Most lenders do not want to offer a HELOC to homeowners that have little equity in their home. The closer that you are to a 100 percent LTV, the less likely it is that you will get approved. If you want the line of credit in order to make improvements to your home, wait until you have plenty of equity in the home before applying. The lower that your CLTV or combined loan-to-value ratio is between the first and second loan, the more favorable a lender will look upon your loan.
A home equity line of credit is not impossible to obtain if you have bad credit, but it might take a little work. The sheer fact that the loan is riskier than any other type of loan makes it more difficult to obtain. Not every lender will have the same requirements or investor overlays as another, so it pays to shop around with various lenders until you find one that will accept your circumstances and approve you for the line of credit that you need.Click to See the Latest Mortgage Rates»