Home equity loans are the second most popular type of loan next to mortgages. The thing about them is that they work well only if there is already debt owed on the house. Usually the best kind of debt is an already-existing mortgage. Since equity is calculated by taking the market value of the home minus any debts pending, this is the only way to get the value of a home’s equity.
A hypothetical example: say a particular home is priced at $200,000. The owners of the home owe $120,000 on their mortgage. Take the price of the home ($200,000) minus the amount of owed debt ($120,000) and the equity remaining is $80,000. There is a catch, however: lenders will only allow a certain percentage of the equity to be taken out as a loan. The common number is 70 – 80%. So, all you have to do is take 70 – 80% of $80,000. That leaves you with $56,000 – $64,000.
There are still hurdles to be jumped over before the money is yours. These hurdles are summed up in the word “creditworthiness.” In ordinary language, this breaks down into three categories: financial history, debt-to-income ratio, and credit score. This last item is the most important of the three from the borrower’s perspective. A borrower’s individual score is expressed as a number between 300 and 900. The demarcation numeral is 620, below which a borrower is considered untouchable and above which a borrower is looked upon more leniently.
If a borrower has a credit score below 620, they can rest assured that no lender will even negotiate with them. A bad credit home equity loan seems impossible to get. What is a homeowner in this position to do? Fortunately, there is still one option available to them that will get them the loan they want: mortgage insurance from the Federal Housing Administration. Loans backed in this way take lenders’ minds off the risk of advancing money to formerly taboo individuals. The FHA will definitely make the dream of a home equity loan for people with bad credit a reality.