Bad Credit Home Equity Loan
A bad credit home equity loan is not unlike a traditional home equity loan in which a homeowner uses the existing equity or added value of their home as collateral against a second loan. The bad credit simply means that the interest rate offered by the lender will be at a much higher than a standard home mortgage loan.
Many traditional bad credit lenders will not make bad credit home equity loans due to the riskiness of the loan, as well as the difficult position of being in the 2nd lien position. This 2nd lien position is the last creditor to be paid in the case of a foreclosure and therefore carries more risk than the 1st lien position.
Bad Credit Home Equity Loan Rates
Bad credit home equity loan rates will vary according to the lender in question, as well as the strength of the borrower. Rates certainly depend on whether a borrower gets line of credit or an additional loan (a second loan) using the equity in their home. A HELOC or home equity line of credit will often be a variable rate, meaning it fluctuates depending on the interest rates. It is possible to lock in a HELOC, but often this will only be possible after 6 or 8 months of carrying the loan. California bad credit home equity loans will usally carry a fairly high interest rate and borrowers should exhaust other options before seeking a hard money type loan.
Reasons Behind Bad Credit Home Equity Loans
There are numerous reasons why a traditional lending institution will not fund a loan. The following are several of the most common.
Borrower Income Cannot Be Verfied
If a borrower cannot verify their income, a bank will not take a chance with a residential or commercial loan. However, private lenders do not require the traditional loan documentation in order to qualify for bad credit home equity loans.
Underwriting guidelines at hard money lender companies allow for a higher debt ratio to still qualify for a bad credit home equity loans. As long as the borrower has 25% or higher equity in a real estate property for purposes of securing the loan, a bad credit lender will often lend to borrowers with high debt.
More flexible underwriting guidelines for bad credit loans mean that a borrower may have a higher incidence of late payments, collections, or other credit problems and still qualify for a home equtiy line of credit.
Bankruptcy or Foreclosure
For borrowers who have filed bankruptcy or have experienced a foreclosure in the recent past, a bank loan is difficult, if not impossible, to obtain. Bad credit home equity loans may still be obtained from hard money lending sources depending on the borrowers financials.