When it comes to finding much-needed funds to cover unexpected expenses, there is a source of funding in your home that can secure large sums. The equity in a home can be tapped into, thereby getting money that may alleviate financial pressures. The problem is in finding lenders willing to approve equity loans with bad credit.
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When it comes to securing loan approval, strict criteria is normally applied. It is to be expected given the size of the loans involved and the fact that a home is being put at risk. But that is not to say that it is impossible to access the cash that your home holds. All that is needed is an understanding of some the factors involved in equity loans.
Understand the Credit Report
It is only obvious that when applying for an equity loan with bad credit that the credit report of the applicant should be checked out by the lenders. The reasons for low credit scores is important, and from the point of view of the applicant, it is important to understand exactly how the scores can affect the application.
Basically, the lower the score the higher the interest rate is set to be. This can make a huge difference when it comes to securing loan approval, and usually an interview with a lender would be marked by probing questions over the report details. When applicants are familiar with, and understand, the report, then they are well armed to handle any questions.
A proactive move would be to get a copy of the report ahead of any application for an equity loan and find out where the weaknesses lie.
Loan To Value Ratio (LTV)
The most important calculation when it comes to equity loans, with bad credit scores or not, is the LTV ratio, or Loan To Value ratio. This is what lenders look to, and represents the percentage of the home equity that is owned by the borrower - not covered by the existing mortgage. The equation is designed to ensure that the value of any loan does not exceed the value of the property.
Securing loan approval depends heavily on matching the equation, but an example shows that it is straightforward so it is not hard to calculate it for yourself. If a home was bought using a mortgage of $250,000, and after 10 years, $100,000 has been cleared off the mortgage principal - this is the available equity.
Most lenders set an LTV of 80%, which means that 80% of $100,000 can be used to secure a loan. If the ratio is set to 125% (which can happen), then it means an equity loan of $125,000 can be secured.
Search High and Low
When it comes to applying for equity loans with bad credit, it is not a good idea to just accept the first feedback that lenders give. The delicate balance between income, low credit scores and LTV means that not every lender will be willing to give the thumbs up. It is important to search extensively for the right deal.
Online lenders are known to offer the best terms, but some good research should turn up a shortlist of 4 or 5 options. These can then be examined more closely to find the right one for the specific situation. It is important too to seek quotes from these lenders to find out what they will offer. Only be finding the right loan package will securing loan approval be possible.
An equity loan is a big deal, involving a lot of money and placing a home at risk. It is only common sense that care is taken in assessing what to agree to.