Most people think of homes as places for family, safety, and relaxation, but few recognize them for the powerful financial assets that they are. Outside of their ordinary uses, homes can be utilized as collateral to secure a home equity loan or HELOC (home equity line of credit). For those with less than optimal credit history, utilizing your home as a financial instrument can help you get approved for loans you can use to cover a myriad of different expenses.
While a low credit score does complicate things, it isn’t a deal breaker entirely. There are a number of different options and lenders that may be willing to offer you their lending services.
Calculating Home Equity Loan Size and Requirements
To calculate your home equity and determine how much you’ll be able to borrow, you need to be aware of your LTV, or loan-to-value ratio. This is a measure in percentage form of how much you still owe on your home in relation to its value. The formula for LTV is: (remaining home balance / current value of the home) x 100.
Let’s look at an example: assume you have a home worth $300,000 and you owe $150,000 on your mortgage. In this case, your LTV would be 50% - ($150,000/$300,000) * 100 = 50.
The majority of lenders will allow borrowers to take out loans of up to 80% of the LTV. In this same example, this would mean you’re eligible for a $90,000 loan: 80% minus your LTV of 50% leaves you with 30%, and 30% of $300,000 is $90,000.
Home Equity Loan vs. HELOC
While home equity loans provide you with a fixed amount from the outset, HELOC's function as a line of credit that you can dip into at any point until you reach the credit limit. A HELOC can be thought of more like a credit card: you have a fixed credit ceiling, you can borrow money up to that limit, and you’re charged interest on the amount of credit that you utilize.
In a home equity loan, the interest rate is fixed and remains the same during the lifetime of the loan. However, HELOCs have adjustable interest rates, which means that the amount of interest you need to pay each month can both rise and fall. This can lead to some very sticky situations in cases where the interest rate spikes, leaving borrowers unable to pay everything off.
Remember that you’re using your home as collateral, so if you default on the loan, your home will be foreclosed on.
Borrowing With Low Credit
For the most part, lenders will not consider borrowers with a FICO credit score below 620. However, if your score falls in the range of 620 to 700 there are a few good options for you.
Most people know Discover because of their credit cards, but they also offer other lending services. Discover will provide home equity loans to borrowers with a credit score as low as 620, which is about as low as you’ll be able to find among the major lenders. The maximum LTV is 95%, making this a great option for those with a troubled credit history.
You can expect to pay an interest rate of between 4.99% to 11.99% depending on the lien position. For loans in first lien position, the maximum interest rate is 8.99%, but for a loan in second lien position, the top interest rate is 11.99%.
Regions Mortgage sets their minimum credit score at 620, and their maximum LTV at 89%. Although the maximum LTV is not as enticing as Discover’s, Regions Mortgage doesn’t incur any closing costs. They also offer a discount for those who set up autopay.
Bank of America
Bank of America only offers HELOCs, not home equity loans, but they will accept a minimum credit score of 660. Like Regions Mortgage, they don’t charge any closing fees, and also don’t require annual, balance transfer, or cash advance fees.
Nonprime loans are the next generation of subprime loans, the infamous financial agreements that led to the 2008 recession. While they bear semblances to their notorious relatives, they have been better regulated.
Non-prime lenders such as Citadel Servicing, Angel Oak Mortgage Solutions, and Carrington Mortgage Services offer loans to those with credit scores as low as 500. They mainly cater to clients that have gone through foreclosures, bankruptcies, or other major credit events that have severely lowered their FICO score.
Quicken Loans’s Rocket Mortgage is one of the better known non-prime lending programs, accepting borrowers with a credit score as low as 580. They don’t offer home equity loans or HELOCs, but they do offer cash-out refinancing. Pursuing this option would mean replacing your current mortgage with a larger one and then keeping the difference as a lump sum loan. For example, if you still owe $150,000, you could take out a new mortgage for $200,000 and then keep the difference ($50,000) as a loan.
Even though a less-than-ideal credit score can make loan hunting more difficult, it is by no means a death sentence. There are a number of possible solutions out there that can help you secure a home equity loan with a low credit score and utilize the financial power of your home to its fullest.