Guaranteed Home Equity Loan with Bad Credit: What You Need to Know

Let’s be honest — life happens. Sometimes, you’re facing financial challenges and have bad credit, but you need to tap into your home’s equity instead of taking out a personal loan.

We have good news: you can still access a guaranteed home equity loan with bad credit. This type of loan allows you to borrow against the value of your home, even if your credit score could be better. This guide will explore everything you need to know about home equity loans, including HELOCs. Read on to learn more about the application process, available loan options, and tips for improving your chances of approval.

What Is a Guaranteed Home Equity Loan?

A guaranteed loan is a type of mortgage guaranteed by a third party. The third party is responsible for paying the borrower’s mortgage if they default on their loan payments. The third party can be a friend, family member, nonprofit organization, bank, or other financial institution. It could also be a government agency or another individual with money to lend out.

The most common form of a guaranteed loan for real estate is a home equity line of credit (HELOC). Generally, it’s best to avoid taking out a guaranteed loan unless you’re sure you can make the payments or be ready for the worst-case scenario. You don’t want to end up in a situation where you owe more than your home is worth and then have no way of paying it off because all of your assets are in your house.

Here’s why: if you take out a home equity loan and don’t pay it back, the lender can foreclose on your property. This is why it’s essential to get pre-approved for any loan amount by a reputable lender like The Associates Home Loan of Florida, Inc. before you apply for it.

The Exception: Home Renovations

The only exception to this rule is if you’re taking out a home equity loan or line of credit to renovate your home. In this case, you can use the money to make repairs and then cover the cost by refinancing your house once they’re complete (assuming you haven’t sold it). This also applies to people who buy an investment property and want to increase its value through renovations before flipping it for profit.

A guaranteed home equity loan can be a lifeline for those with challenged credit scores; lenders may be more inclined to approve you, even if you have “subprime” or lower credit scores.

Benefits of a Home Equity Loan with Bad Credit

Even with a low credit score, a home equity loan can offer several advantages:

• Access to Funds: You can use the equity in your home to finance home improvements, consolidate debt, or cover emergency expenses.
• Lower Interest Rates: Compared to personal loans or credit cards, home equity loans typically have lower interest rates, even for those with subprime credit.
• Tax Benefits: In some cases, interest paid on a home equity loan may potentially be tax-deductible, especially if the funds are used for home improvements (please consult a tax advisor for more information).

Minimum Credit Score For Guaranteed Home Equity Loans

Lenders use credit scores between 300 and 850 to predict how likely you are to repay your debts. A credit score of 700 or higher is good, while anything below 600 is considered subprime. The higher your credit score, the better deal you’ll get on a home equity loan.

However, lenders will typically require a credit score of 620 or higher before they consider issuing a guaranteed loan to borrowers with poor credit.

Tips For How to Improve A Low Credit Score

You’ll need to improve your credit report to get a home equity loan with a bad credit score. There are several things you can do for a lower credit score to raise ratings on credit reports:

• Pay down debt and reduce the number of open accounts that appear on your report.
• Get more credit in good standing (no late monthly debt payments or foreclosures).
• Keep balances on loans low and current.
• Create an overall positive financial history.
• Keep your credit card balances below 30% of their credit limits.
• Avoid new credit line inquiries and close credit accounts you don’t use (unless you’ve had them for a very long time).
• Be more responsible with credit/loans.
• Get a co-signer.

The lender will be more likely to approve your application even if you have a lower down payment or less than ideal debt-to-income ratio than usual because they know your financial situation has improved since the last time you had bad credit.

Types of Home Equity Loans

There are several loan options available if you’re seeking a home equity loan with bad credit. Our team at Associates Home Loan can help assess your credit report and home equity to see what makes the most sense for your situation.

Home Equity Loan

Are you a homeowner who needs a one-time sum for major expenses such as home renovations or consolidating high-interest debt? A home equity loan allows you to borrow a lump sum against the equity in your home. This is a fixed-rate loan, meaning you’ll have consistent monthly payments and interest rates over the life of the loan. Homeowners with bad credit may still qualify if they have sufficient equity in their property.

HELOC (Home Equity Line of Credit)

A HELOC with bad credit works similarly to a credit card. Instead of receiving a lump sum, you’re given a revolving line of credit, up to a predetermined limit, that you can draw from as needed. HELOC loans with bad credit may come with adjustable interest rates, so the amount of your monthly payments can fluctuate.

This is best for homeowners who need access to funds over time. A few good reasons to take advantage of a HELOC include making home improvements that will increase the value of your home, establishing an emergency fund for unexpected costs, and consolidating high-interest debts. Making home improvements and upgrades can substantially increase the value of your home, and consolidating debts can save you a great deal of money that would have gone toward interest.

FHA Home Equity Loan with Bad Credit

The FHA program doesn’t offer a straightforward home equity line of credit or a home equity loan, as they are considered a second loan. However, you can apply for FHA cash-out refinancing so you can get a refi loan larger than the amount you currently owe on the home and take the difference in cash. You can use this lump sum for any purpose, such as paying off bills or investing in real estate projects. It’s best for homeowners looking for more affordable financing options and lower interest rates despite having bad credit.

On top of the usual requirements, you’ll also need to meet the following ones:

• 12 consecutive on-time monthly payments – OR –
• All on-time monthly payments since obtaining the loan – AND –
• Made a minimum of six mortgage payments.

FHA loan rules also dictate that you must make a payment the month before the new loan. (You can’t skip mortgage payments when refinancing with FHA loans.)

FHA loans are for homeowners with a FICO score of 580 or higher. An FHA home equity loan has a minimum down payment of 3.5% and a maximum loan-to-value ratio (LTV) of 78%.

Subprime Home Equity Loans

If your credit score is too low to qualify for an FHA-approved home equity loan but still high enough (around 600) to access a subprime home equity loan, this may be the way to go if you want to use your house as collateral.

The primary benefit of subprime loans is that they allow borrowers with limited or low credit scores to finance a home, car, or other purchases.

It’s essential to note that subprime home equity loans often come with higher interest rates to compensate for the increased risk to the lender.

However, while the rates may be higher, this option can still provide an opportunity to access your home’s equity and improve your financial situation if you’re using it to pay off debt and obtain a lower overall rate than a credit card or personal loan. You may also consider refinancing at a fixed interest rate at a later date when your credit score improves.

How Long Does It Take to Get a Home Equity Loan?

There’s no single answer. The truth is that home equity loan approval can take anywhere from a week—or two up to months in some cases. Most lenders will tell you that the average window of time to get a home equity loan is between two and six weeks, with most closings happening within a month.

Your timeline will be unique, so talk to your lender for more information about when you can expect to close.

Here’s a helpful breakdown of what to expect during the process so you can get a feel for timing:

1. Check Qualifications

You must meet a few requirements before you can qualify for a home equity loan, which will vary from lender to lender.

Typically, the most common qualifications you’ll need to meet include:

• A minimum of 15-20% equity in the property (meaning you’ve paid off at least 15-20% of your mortgage)
• Evidence of steady employment and steady gross monthly income (through pay stubs and tax records)
• A low debt-to-income ratio below 50% (but below 43% is ideal)
• FICO score above 620 (though some lenders require a higher score; read our guide about qualifying for a loan with bad credit)

2. Submit Your Application to Associates Home Loan

Begin your application for the loan. You’ll need to submit several documents and answer questions about your property, income, and debt.

If you’re not sure where to find specific documents or you no longer have certain paperwork, let us know. We can often help you figure out how to obtain certain documents or file with local governments to find property records.

3. Get a Property Evaluation

You may need an official property evaluation and inspection by a certified appraiser, but the exact requirements for this may vary depending on the bank.

4. The Underwriting Process

Once the property evaluation is complete, an underwriter will compare your financial profile to the home equity loan requirements. This comparison will determine whether you can officially get approval by examining your creditworthiness and borrowing history.

The underwriting and processing portion of your loan application may take a full month, so try to be patient during this stage!

5. Closing

The final step is closing. In this stage, you’ll meet with the lender and any other essential parties to finalize the loan, sign your paperwork, and arrange for the disbursement of funds. This stage will typically take a week or less.

Factors That Can Impact Timelines

Several factors can either speed up or slow down the home equity loan timeline. Many closing dates get pushed back to allow for more time to review documents, finish the appraisal, and more.

While some factors may be out of your control, here are a few likely culprits behind delayed approval timelines:

• Insufficient documentation or incomplete application (not having documents readily available may lead to delays in processing your application.)
• Verification (this requires a detailed review of all financial and property information)
• Home Valuation (depending on the time of year, appraisers get busy)
• Closing challenges (this could be anything from coordinating scheduling with all parties who need to be there, including signers and a notary, to unforeseen funding delays)

How to Get Equity Out of Your Home with Bad Credit

And Improve Your Chances of Approval!

If you meet all these home equity loan requirements and still can’t get approved for a home equity loan, you can improve your chances of approval by taking the following steps:

• Increase Your Home Equity: Pay down your mortgage as much as possible before applying to boost your home equity.
• Improve Your Credit Score: Even small improvements in your credit score can make a difference. Follow our tips in this article, pay off existing debts, and ensure all bills are paid on time.
• Choose a Specialized Lender: Work with a lender specializing in subprime home equity loans, like Associates Home Loan of Florida, Inc., to increase your chances of getting approved.

Apply For a Home Equity Loan (Even With Bad Credit!) Today

If you want to take advantage of a home equity loan with bad credit, don’t worry! Our team of home equity lenders at Associates Home Loan of Florida has years of experience helping people with bad credit get home equity loans with guaranteed approval in Florida state.

We’ll help you at every step so you’re confident about making this important financial decision. We encourage you to apply today if you’re looking for a home equity loan with bad credit. You can do so by calling 813-639-8804 or filling out our online application form. No matter your credit score situation, we’ll find you the best loan options!

FAQs

How do I find reputable home equity lenders?

The quick and easy answer: use The Associates Home Loan of Florida, Inc.!

The longer one: finding reputable home equity lenders involves researching and comparing lenders. You don’t want to jump at the first unsolicited lender offer in your inbox; too many scammers or unscrupulous companies call themselves “home equity lenders” that will take advantage of you.

What is a debt-to-income ratio (DTI), and how does it affect my ability to get a home equity loan?

Your debt-to-income ratio (DTI) is a measure of your monthly debt payments relative to your gross monthly income. Lenders use this ratio to assess your ability to manage payments and determine how much you can borrow. Typically, a lower DTI ratio (below 43% is common) indicates better financial health and may improve your chances of loan approval.

Can I get a new home equity loan if I already have one?

Yes! It is possible to get a new home equity loan if you already have an existing one. However, lenders will consider your total debt, income, and creditworthiness to determine if you qualify for additional borrowing. Evaluating whether taking on more debt is financially prudent and fits your long-term financial goals is important.

What is a cash-out refinance, and how does it compare to a home equity loan?

A cash-out refinance allows you to replace your existing mortgage with a new one for more than you owe and take the difference in cash. This can be a good option if you want to consolidate high-interest debt or make significant home improvements. It differs from a home equity loan, which is a separate loan in addition to your mortgage.