Why Bad Credit Will Not Stop You From Getting A Home Equity Loan
Bad credit will not stop you from getting a home equity loan. The reason is the real estate market. When the market is up, lenders are happy because should any borrowers default on their loans, the lenders can seize the equity and the house itself. If the house is worth more than the equity, all the better for the lender. When the market is down, lenders are still pretty happy about home equity loans because they can use the equity to leverage the house should the borrower go into default.
No lender wants to be stuck with a useless collateralize asset. This is why mortgages are so hard to get when the real estate market is down – if the borrower defaults and the lender seizes the house, the lender’s left with a very illiquid asset. No one will touch the house with a ten foot pole if the lender forecloses on it in the midst of a real estate downturn. Lenders view home equity loans much more favorably during conditions like these because the lender can seize an asset that is already liquid: the equity itself.
Throw bad credit into the mix and the distinction between home equity loans and mortgages during a recession becomes even sharper. A borrower with bad credit has almost no chance of getting a mortgage, since their bad credit tells the lender that they are likely to default on the loan. The specter of a worthless house is so powerful, lenders generally will not consider a mortgage application from a borrower with bad credit no matter how hard the borrower tries to make themselves look attractive.
A home equity loan for bad credit is entirely different. The lender’s perspective aside, there are some practical steps borrowers can take to increase their attractiveness to lenders. They can pay a large amount of the balance up front as a down payment; say around sixty percent of the total principal. They can also get a co-signer to help cover their risk when applying for the loan.
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