Getting a Home Improvement Loan With Bad Credit

If you have bad credit, your options for a home improvement loan are rather limited. That doesn’t mean that they are impossible to get, though. While you probably can’t go to your local bank and get a home equity loan, there are other loan options available from lenders throughout the nation.

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What are Your Options?

First, you should know there are two types of home improvement loans you can try to get – a home equity loan or a home equity line of credit. They are two different types of loans.

A home equity loan gives you a fixed amount of money to work with for your home improvement. You pay principal and interest as soon as you take the loan out and you cannot reuse the funds once you pay them back. They usually have a fixed interest rate, which lets you know exactly how much you need each month.

A home equity loan is a good option if you have fixed, one-time occurrence expenses. It’s not a good option for those that have recurring costs that may need access to the funds again. You receive the funds in one lump sum and do not have a draw or repayment period. The entire term (usually 5 to 15 years) is your repayment period.

A home equity line of credit gives you access to a credit limit. You don’t receive the funds in one lump sum. Instead, the money sits in an account where you can access them as needed. You only owe interest on the funds you use. You can also opt to pay interest only for the first 10 years of the loan. After the 10 years, the draw period ends and you will owe principal and interest payments on the outstanding balance amortized over 20 years.

Getting a Home Equity Loan or HELhomeOC With Bad Credit

A part of qualifying for the home equity loan or HELOC is meeting the lender’s requirements. These usually include:

  • Decent credit score
  • Low debt ratio
  • Equity in the home

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If you don’t meet the ‘decent credit score’ requirement, are you out of luck? You may still have options, so don’t give up yet. Lenders look at the big picture – not just your credit score. If you have other compensating factors that make up for the credit score, your lender may still give you the home equity loan or HELOC.

Those compensating factors could be any of the following:

  • Low debt ratio – This measures the amount of your money that is already accounted for by bills each month. If you have a low ratio, it means a good portion of your monthly income is not tied down to obligations yet. This can help your chances of getting approved since the lender has your home as collateral and your debt ratio is low.
  • A lot of home equity – A low first mortgage can help your chances of approval on a home equity loan. The less you owe to the first mortgage company, the more money that exists for the home equity lender to claim should you default on the loan.
  • Stable employment – The more consistent and stable your employment is, the better your chances of approval. This lets lenders know that you have had the same income for a while (or increasing income) and you have a good chance of paying your bills on time.

Other Options

If you can’t get approved for a standard home equity loan, consider the following options:

  • Get a co-signor – If you have someone in your family willing to go on the loan with you, they may help lower the risk of your loan, allowing you to gain approval.
  • Find a private lender – Sometimes private lenders have programs that big name lenders don’t have. They tend to keep the loans on their own books, so they set their own requirements, which may be more lenient.
  • Try a government-backed loan – The USDA and FHA both have home improvement loan options that have flexible underwriting requirements, including low credit score requirements.
  • Try a hard money loan – If all else fails, you can try to get a hard money loan for your home improvement needs. Just know that these loans are usually very short-term and carry much higher interest rates than home equity loans.

There are ways you can get the home improvement loan you need even if you have bad credit. If all else fails, work on improving your credit. If you don’t have an immediate need for the funds, it may be a good idea to go this route first. It will give you a better chance at securing a lower interest rate and better terms on your loan.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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