You paid off your house a while ago and have enjoyed being mortgage free. However, in recent years you hit bad luck and ruined your credit. Now you want to tap into your paid off house and get some of that equity back in cash to help make ends meet. Is it possible with your bad credit?
Refinancing a Paid Off House
You must know that the bad credit you accumulated may hurt you. Certain lenders will not even consider your application. You may find a few willing participants, but they will be harder to come by. Your best bet is to avoid the traditional banks and check out the private banks instead. These are the banks who keep the loans on their own books. You may even know them as subprime lenders. Because they don’t have to answer to any investors or government programs, they can make up their own rules. They may look at your case in a different light and be willing to provide you with a loan on your paid off house.
Emphasize your Good Qualities
Just like with any other loan program, you need to figure out a way to emphasize the good qualities of your loan application. Of course, your bad credit will glare right at any lender, but it does not have to completely stand in the way. If you can show the lender that you have good qualities, including any of the following, they may be able to overlook the bad credit:
- Your equity position is the key. Owning your home outright is a large factor to any lender. If you don’t plan to take too much of the equity out of your home, they may be able to use your equity position as a compensating factor.
- A stable job history helps. If you have had the same job for many years, it can show consistency to the lender. A person who hops from job to job will look riskier because they cannot sit still. A long-term job history, however, shows that you like stability. Lenders like to see this.
- A low debt ratio is crucial. Since you don’t have a mortgage on your home right now, you will experience extensive payment shock with a new loan. If you have a large number of other debts on your plate, lenders may not want to lend you more money. On the other hand, if you have minimal debts already and can combine this with a steady job, you have a leg to stand on with various lenders.
Explain your Bad Credit
Any lender will need to understand why you have bad credit. It helps if you had a one-time occurrence that affected you that you have bounced back from. For example, if you suffered a serious illness that kept you from working for several months and you met with hard times, a lender can accept this. If you don’t have an explanation, though, the lender may have a hard time overlooking your bad credit. They need to see not only that it was a one-time occurrence but that you have bounced back from it. In the above example, if you show that you started making your payments on time since the date you returned to work, the lender can take your explanation with credibility.
More than the Loan-to-Value Ratio
You have to understand that lenders look at the whole picture. They do not just look at the LTV. In this case, you don’t have an LTV if you have a paid off house. This works to your benefit. However, the lender needs to look at your credit, income, and assets to make a final determination. Just owning your house free and clear is not enough, especially if you have bad credit. Something went wrong along the way somewhere and the lender needs to determine where. This is why they look at the whole picture and not just how much equity you have in the home.
Get a Co-Signor
You might not want to think about co-signors at this point in your life, but if it means a loan approval, you might change your mind. A co-signor helps the lender overlook your bad credit, especially if the person you choose has great credit. This helps to decrease the risk the lender has to take. It is not the ideal situation for the person signing the loan with you because they become liable for the loan if you default, but it does help you get out of a financial situation.
Reverse Mortgage May be an Option
If you are at least 62 years old, you have one more option to tap into the equity in your home – the Reverse Mortgage. This FHA program gives you access to a portion of the equity of your home and does not require monthly payments. This can help you get the cash you need without strapping you for cash each month. In addition, your low credit score may not even affect your ability to secure the funds. Lenders look at your age and the equity in your home. The older you are, the more cash you have access to with this program. The bank does not require repayment until you sell the home or pass away – whichever comes first. It allows you to enjoy the equity you have in your home while you are able to, though.
If you have bad credit, you do have options to get cash out of a paid off home. You have to be creative in your quest to secure a loan, though. If you are not elderly or a Reverse Mortgage is not an option, you may have to shop around with different lenders. Your best bet is the subprime lenders who don’t focus on credit scores as much as standard lenders do. If you have compensating factors to make up for the risk you pose, you have a better chance at securing the cash you need.
