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A home equity loan can be a great way to borrow money at a low cost to fund home improvements or consolidate debt. But if you have bad credit (FICO score below 580), you could have a tough time getting approved.
Getting a home equity loan with bad credit isn’t impossible, though. Here’s how to do it.
4 Tips to Boost Your Chances of Approval
1. Check Your Credit Score
Before you apply for a home equity loan, it’s a good idea to find out where your credit currently stands. Free sites such as Credit Karma provide educational credit scores, which can be helpful for getting a ballpark idea of your current credit score. However, most lenders rely on your FICO credit score, which sometimes requires a payment to see the score—though some credit card companies allow customers to get their FICO scores for free.
Most lenders require a score of at least 680 in order to get approved for a home equity loan. That’s considered a “good” score. However, you may still be able to qualify for a home equity loan with bad credit. Since home equity loans are secured by your property, meaning your home serves as collateral if you default on the loan, there’s less risk to the lender. And it can help if your other financial qualifications are strong.
2. Calculate Your Monthly Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is one of the most important factors that lenders consider when approving you for a mortgage. This number measures how much of your monthly gross income is used to pay your debt obligations, expressed as a percentage. For example, if you earned $6,000 per month before taxes, and you paid $2,100 a month for your student loan, car and credit card payments, your DTI would be 35%.
Lenders prefer to see a DTI of 43% or less, though some may accept up to 50% in some cases. However, if you have bad credit, you’ll need a pretty low DTI to qualify for a home equity loan.
3. Check Your Home Equity
You also need to have sufficient equity built up in your home, especially if you’re attempting to secure a home equity loan with bad credit. Lenders use what’s called a loan-to-value (LTV) ratio that divides your current mortgage balance against your home’s current appraised value. For example, if your home is worth $300,000 and you still owe $240,000 on your mortgage, your LTV is 80% ($240,000/$300,000). That means you have 20% equity in your home.
Typically, lenders require that you have a LTV …….