Bad Credit HELOC Loans

People with bad credit are often leery of applying for home equity line of credit (HELOC) loans. This is because many of them assume that they can’t get HELOC loans with bad credit. However, this is not necessarily true. While there are definite consequences that come as the result of taking out bad credit HELOC loans, the fact of the matter is that the most important factor in a home equity line of credit loan decision is how much equity you have.

Equity: a definition

Many people have a vague idea of equity but do not really know what it is. Simply put, equity is the amount of ownership you have in your home. It is the difference between how much money the home is worth, and how much money you still owe the bank. For example, if your home is worth $165,000, and you still owe $95,000, the amount of equity you have is $70,000 ($165,000-$95,000). So, when it comes to getting a home equity line of credit, you can usually borrow up to about $70,000.

A bad credit HELOC loan

If you have bad credit, though, there are a few extra ground rules when it comes to HELOC loans. First of all, you should understand that you may not actually be allowed to borrow the full amount of the equity in your home. While you probably will be able to, some of the more conservative lending institutions will not loan you the entire amount of your available equity if you have a poor credit score. And, of course, no matter how much you are lent, you will most likely pay a higher interest rate than you would if you had good credit. You should also be aware that bad credit HELOC loans are often harder to get fixed rates for. You are more likely to be required to get an adjustable-rate home equity line of credit if you have bad credit.

Watching out for borrowing more than your equity

Some lenders will actually give bad credit HELOC loans for more than the amount of the equity in the home. This is done on the assumption that your home will increase in value and so the amount of the loan will be covered. However, you could be stuck if your home doesn’t increase as much as the lender thinks. If you sell the home, you may still owe money, and that can be a difficult situation. Additionally, you might be stuck making higher monthly payments than you can afford, due to the larger amount borrowed. This can lead to foreclosure. You should be careful of getting a HELOC loan from a lender that pressures you to borrow more than your home is worth.

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