If you have a history of bad credit, you may be wondering how you can access the equity in your home. After all, you’ve made the investment in your home, and you may want the flexibility that a home equity line of credit offers.
However, traditional banks will turn down applications from borrowers with low credit scores. So what are the other options for a bad credit home equity line of credit?
Continue on to understand HELOCs and what to expect when applying.
Get a Home Equity Line of Credit with bad credit?
A home equity line of credit (HELOC) works much in the same way as a credit card. Your HELOC will have a limit, and you can withdraw from it at any time. The draws will accrue interest, and then you’ll make payments.
When you take out a HELOC, another mortgage is placed on your property. This is also known as a second mortgage. Your payment amount will vary depending on the balance on your HELOC.
The benefits of a HELOC are that, unlike other types of home loans, you can make draws and repayments over and over. You can use the HELOC for all kinds of expenses, including:
- Home Improvement
- Unexpected expenses
- Personal loan debt consolidation
- Education Expenses
The amount of your HELOC will be based on how much equity is in your home. Your equity is the difference between your home’s value and how much you owe on your mortgage. Different lenders will have different limits on how much of your equity you can use for a HELOC.
Will a Home Equity Line of Credit work in Your Favor
Home loans, including HELOCs, are all about risk for a lender. However, even if you have bad credit, your application may have other factors that would make you a good borrower for a HELOC.
Equity in Your Home
Having equity means you can use your home as collateral to borrow. The more equity you have, the less risk your new home equity line of credit will be.
For example, a home worth $250,000, with a mortgage balance owing of $175,000. A lender might be willing to lend up to 80% on a HELOC, or up to $200,000. That means you have enough equity for a $25,000 HELOC.
Your Income and Other Debt
If you have stable employment and sufficient income, you’ll be able to show a lender that you can afford the payments of another loan. This is especially important with a HELOC since the amount of the payment will vary each month, depending on how much you have drawn.
Having a low amount of debt, or low compared to your income, is also to your benefit. Your lender wants to make sure you’re comfortable with an additional loan.
Recent Credit History
Bad credit usually stems from your past, such as bankruptcy or collections. If you have timely recent payments, you will show that you are committed to meeting your obligations.
While you may not be able to get a home equity line of credit in Canada from a traditional bank if you have bad credit, there are some other options.
Traditional banks are known as “A lenders” and are probably what comes to mind when you think of a mortgage. However, A-lenders have strict requirements. If you do not meet all of the criteria, you will not be approved for a loan.
Because one of the main criteria for an A lender is your credit score, a bad credit score can mean that a mortgage with an A lender is not an option. Fortunately, there are several other lending options.
A “B Lender” is a mortgage company that is funded through non-traditional lending sources but is still governed by federal regulations. These may include trust companies, credit unions, monoline institutions, and tier 2 banks.
Sub-Prime B Lenders with Home Equity Line of Credits
Sub-prime refers to a borrower at high risk of not repaying a mortgage. Alternative B lenders may have more restrictions than A Lenders but are options for borrowers with lower credit scores.
A private financing lender can also offer a home equity line of credit and is not governed by federal regulations. These might be registered corporations or individual lenders willing to provide funds without strict qualifications.
Applying for a Home Equity Line of Credit with Bad Credit
When you apply for a HELOC, you’ll need to supply some information to your lender. This will be similar to the time you applied for your first mortgage. Some documents to have available are as follows:
- Proof that you own your home
- Proof of income or self-employment income
- Information about your first mortgages, such as term or amortization
The lender will assess your home’s value as part of your HELOC application to determine how much you can borrow. In addition, the lender will look at a potential borrower’s credit score.
By selecting a lender that works with borrowers that have bad credit, you increase your chances that your application will be approved. The mortgage balance owing on your first mortgage will impact the amount you can qualify for. It also helps to calculate the amount of equity you have.
Your income will be used to check your debt-to-income ratios in the application. Income confirms the monthly payments you can afford and makes qualifying easier.
Don’t Let Bad Credit Hold You Back
Bad credit should not prevent you from using the equity in your home. Besides you’ve worked hard to build up that equity. You deserve to access that equity and use it to your advantage. Who knows you may use the line of credit to turn your credit into good credit.
If you are looking for a home equity line of credit in Ontario, a mortgage broker can help you find the option that’s best for you. At LendToday, we can connect you with the right lender for your financial situation.
Our experienced reps can guide you through the process, and you’ll receive a quick response to your application.
If your looking for help contact us at 1-855-242-7732 or apply online today.
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