Buying a home is an important step in a person's life. For many Americans, their home is their greatest asset. The more a homeowner pays down their loan balance, the more equity they hold in their property. The equity is an important financial tool because it can be utilized to get you out of tough situations or build opportunities for your future.
Equity is based on the appraised value of your home, so if the value of your home goes up, so does your equity percentage in the home. Equity is a valuable tool that can be used to give homeowners the cash they need to stay ahead, but it can be tough to access your home’s equity if you don’t have a good credit score.
Today, let’s break down some key home equity options for homeowners with low credit.
Home equity loans are popular equity accessibility tools. In a nutshell, you take out a loan while borrowing against the equity you’ve built up. The equity also acts as collateral, so you lose it if you default on the loan. As you receive cash upfront, a home equity loan allows you to use equity for a home remodel, a medical bill payment, closing costs for a new home, or credit card debt repayments with a fair amount of flexibility.
On the downside, you’ll need a credit score of 680 or higher to qualify for most home equity loans, especially those with good terms and interest rates. It’s possible to get a home equity loan with a credit score lower than this, but you’ll need to settle for potentially high origination fees and high interest rates.
As with other loans, you need to consider the loan amount, the home equity lender, and the repayment period to make sure it’s the right step for you. Your first mortgage balance can determine if a new loan is wise, even if you’re a qualifying homeowner with little credit card debt. Keep in mind that unlike a cash-out refinance, a home equity loan does not result in a new mortgage.
Alternatively, you can pursue a home equity line of credit (HELOC), which works similarly to a home equity loan in that you can access your home equity; however, with an equity line of credit, you don't have to access the full allotted amount at once. You can borrow up to the maximum limit during the draw period, then repay all at once or with monthly payments. The credit limit depends on your credit score, the equity on your existing mortgage, and your overall financial situation.
Fortunately, it's easier to get a home equity line of credit with a low credit score. You need a minimum credit score of 620 in most cases, plus at least 15% to 20% equity in your home. Note that your debt-to-income ratio (DTI) must also be 43% or lower for most home equity lines of credit. You may also need to pay closing costs.
Just like a traditional loan, a HELOC uses your home as collateral. You can consider using a home equity line of credit if you want ongoing or long-term access to your equity. It’s ideal if you know that you have the means to consistently pay back any credit you borrow.
HELOCs are a great option for accessing home equity; however, you’ll need to be ready for an interest rate that varies based on the prime rate (unlike a fixed interest rate).
Balance Homes is a co-ownership solution with a mission to help American homeowners stay connected to the homes they love by offering a flexible alternative to traditional financing when life circumstances change. Our model also focuses on long-term financial health and education, helping homeowners understand their options, manage their equity, and build a plan that fits their needs.
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Sources:
What Is a Loan Origination Fee? | Mortgages and Advice | U.S. News
Collateral Definition, Types, & Examples | Investopedia
What Is a Draw Period on a HELOC? | ExperianWhat is a debt-to-income ratio? | Consumer Financial Protection Bureau
