Bad Credit Home Equity Loans

Should You Try to Rehabilitate Your Bad Credit by Using the Equity in Your Home

If you have bad credit, but somehow managed to keep your home and grow your equity in it, is it wise to try to salvage your credit score by tapping into that equity through a Home Equity Line of Credit (HELOC) or a simple Home Equity Loan?

I don’t think you will find many people with bad credit who haven’t already used up their equity, but let’s assume there are some. Or let’s assume, you want to take out one of those 125% Home Equity Loans. Should you do it?

If you own a home, you are more likely to qualify for some kind of loan, even if your credit is bad. That’s because the lender will have a mortgage on the house which means he will get at least part of his money back (if it doesn’t hold the first mortgage).

Secured loans will also carry lower rates than unsecured loans, so this might be the only place a bad credit risk can get more financing.

If you have bad credit because you got laid off, had uninsured medical expenses or lost your business to a hurricane, the answer is maybe – if you can afford it. You’re in trouble because of circumstances that were likely not totally under your control.

You are otherwise responsible and want to set things straight as quickly as possible.

If your credit is bad because you can’t control your spending, what good will borrowing more money do? You’ll just blow it, be further in debt and now face foreclosure on your home.

In this circumstance, careful budgeting, cost controls and finding extra income is the answer, not more borrowing. Like an alcoholic, you have to sink to your own personal low.

Maybe then you can take control of your life. Until then, stay away from credit, especially if the roof over your family’s head is at stake.

If you fall in the first category, you might want to sit down with a credit counselor, consumer debt advocate, Certified Financial Planner or even a bankruptcy lawyer. You need solid advice and are probably too emotionally involved to figure out all the options on your own.

While the money may be available to you and you know you will use it wisely, will it be enough to bail you out completely? And if it does, will you be able to keep up the mortgage payments?

The better alternative might be to continue the payments on your home and go bankrupt or try for debt negotiation. In this way, you shed the unaffordable debt while protecting your major asset. Also you’ll have a head start on re-establishing your credit.

Or maybe you should sell and buy a cheaper house or rent.

Remember that if you are out of a job, a bad credit score or bankruptcy might keep you from getting hired. There are many variables you must consider. An expert in the field will help you make the best choices.

If you do decide to borrow, you will likely been judged to be in the sub-prime category of loan risks. You will face interest rates of up to 2% more than a prime borrower would pay. You will also face higher fees and closing costs.

So shop for your loan carefully. Check local lenders and the internet. See what the best deals are that you can qualify for.

A fee-only Certified Financial Planner works by the hour and doesn’t get commissions for products he recommends. He should also have contacts with banks and other lenders and may be able to find you the best deal of all.

Consider all your options and make the best decision based on the knowledge you obtain. Then stick to your plan and don’t second guess yourself.

---

October 2007 Update

The bad credit/no credit mortgage industry has dried up. A lot of sub-prime lenders have gone bankrupt and lenders have found that they can no longer package bad credit loans and sell them as securities.

If you have bad credit, it might be best to spend a couple of years rebuilding it before trying to get a mortgage.

If any are available, bad credit mortgages will be quite expensive. With a better credit score you can save thousands on interest and mortgage application and closing costs.

See Is It Time to Refinance? and The Subprime Mortgage Mess for more information.

  | Top | Mortgages | Home |