Home loans can help you find additional value in your home. By borrowing money for your property, you can finance repairs and renovations to your home, which can add to its value. You can also use the money to help tackle financial emergencies or even pay down debts.
That’s because home equity loans and home equity lines – the two most common forms of home borrowing – tend to have much lower interest rates than non-real estate-guaranteed debt, such as credit cards.
“Getting a relatively low-interest loan, especially if it is meant to cover the cost of a major home improvement or renovation, could be a smart financial move,” said Elliot Pepper, CPA, CFP and co-founder of Northbrook Financial.
But being a homeowner isn’t the only requirement to borrowing for real estate.
First, you need to have what the name of these loans implies: home equity. You borrow against the value of your stake in your property, which is your home equity – so you owe less on your mortgage than the home is worth. If your home is valued at $ 300,000 and you owe $ 100,000 on the mortgage, you have $ 200,000 in home equity.
The more equity you have in your home, the more money you can borrow, all other factors remaining the same – up to a maximum of 85%. This amount is determined by factors such as your income and creditworthiness, as well as the value of the property.
Second, that creditworthiness, as expressed in terms of your creditworthiness, and your income must be sufficient for a lender to decide that you can borrow money responsibly. The minimum credit score required to apply for a home loan for most lenders is 620; You see the best interest rates above 720.
How your creditworthiness plays a role in taking out a home loan
You should familiarize yourself with credit score areas so you can see where you stand:
Credit score areas
| credit-worthiness | credit rating |
|---|---|
| 300-579 | Very poor |
| 580-669 | Just |
| 670-739 | Good |
| 740-799 | very good |
| 800-850 | Out of the ordinary |
Under 720, you likely still qualify for a home loan or can refinance an existing loan, says Travis Tracy, a certified financial planner with Fortitude Financial Planning. But once your credit score is below that threshold, things start to look a little bleaker.
Can You Get A Home Loan With Bad Credit? And should you?
What to Do When You Have Bad Credit
“If you are planning on getting a home equity loan and have at least the 15-20% equity required but have poor credit, the first steps you should take to improve your credit score,” said Lindsay Martinez, owner and financial planner at Xennial Planning.
She recommends downloading your credit reports from any of the three big agencies – Equifax, Transunion, and Experian – and making sure there are no inaccuracies that could negatively affect your score. If so, she suggests taking immediate steps to challenge and correct them with the credit agency. (A credit report is not a credit score; they are different things, although the former affects the latter, which can be viewed for free in many online credit card accounts.)
“Sometimes things that you corrected might not have fallen off your report and it could affect your score,” says Tracy. Receive a free copy of your reports once a year from each of the three agencies at annualcreditreport.com.
It’s also a good idea to take a look at your budget and spending habits.
Failure to pay off your credit card balance in full every month will increase your credit utilization, which will lower your score. Addressing the root cause of the problem can help narrow down the steps you might want to take to resolve it.
Martinez also advises against applying for additional credit, as any application will result in a temporary hit of a few points on your score or no debt. Missing invoice payments also have a negative effect on your credit.
“Longstanding tenure and / or a high income can increase your chances” of getting approved for a low credit home loan, Martinez says. High income can also improve your debt-to-income ratio, which most lenders like to see below 43%, she says.
If you’re ready to move on, Tracy recommends checking with your current lender to see if they’re ready to work with you. If you already have a mortgage that you are paying on time, this could suggest to the bank that you are a trustworthy borrower.
Whichever you choose, experts strongly advise against using home equity to fund personal expenses like vacation or a fancy new car.
Borrowing against your residence means posting it as collateral; If you stop paying the lender, that residence may be confiscated. Taking this risk to fund personal expenses is not a wise financial decision.
Bottom line
Getting a home loan with bad credit is challenging but not impossible. A low debt-to-income ratio and solid employment history can help make up for a low credit score in the eyes of a prospective lender.
But what you want to ask yourself is whether you need that loan now. Credit isn’t fixed, so it may be best to reconsider your spending habits and wait until you can upgrade your credit score. Not only will this help you get the loan, but also at a much better interest rate.
