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).
If your credit score is lower than 600, you may still be able to access the equity in your property by working with Balance.
Balance is a home equity investor. If you are approved for our homeownership program, your mortgage loan will be replaced with an equity investment from us. Balance may pay you up to 85% of your home’s mortgage value as a lump sum, which you can use for home renovations or payments toward higher-interest debt payments.
You can always purchase the equity back from us and become the sole owner when you’re ready. In the meantime, you remain an owner of your property, and you won’t have to move or give up control over your property.
Co-ownership with Balance is the ideal choice to use your home’s equity if your credit score or payment history disqualifies you from other types of loans. With your mortgage paid off, you make affordable monthly payments to Balance, and you retain access to a portion of your home equity to avoid setbacks while your credit recovers.
With that money, you can quickly pay off any other debts or bills you have under your name. Think of it as allowing your credit score to work for you once again. Because of this, co-owning your home with Balance could be the best way to ensure long-term credit recovery without dealing with another bank, lender, or credit union.
Through Balance, you can access the equity in your property without needing to have a high credit score. In fact, the average Balance client has a credit score of just 538!
Balance takes the burden of your current mortgage off your shoulders. You can use your home’s equity to pay off debt, save for college, or do anything else you need, all while retaining peace of mind and your homeowner status.
Want to learn more? Get a free proposal today.