When you build a new house, you hope to build lifetime memories in it. This way a home can be the sole identity for your health, wealth and happiness. Also, a house provides you the opportunity to get an easy sanction for big, unplanned spending, especially when credit doesn’t allow so.
So, will you let bad credit affect your borrowing capacity in the near future? Bad credit can substantially impact your chances of getting a bigger loan which is worth higher than your loan amount which can provide the convenient option of taking a home equity loan.
What is Home Equity Loan?
A home equity loan is a safe loan that can provide collateral security to the bank/financial institution, for events when you do not intend to pay back the loan. In short, you will be taking money against the house you’ve built. To understand equity better, it is essentially the difference between the augmented value of your house and the amount payable on your debt. Since here you are keeping your house as a collateral asset, you do not need to have an excellent credit score.
The main ‘to-dos’ related to home equity loans can be seen as under:
1. Accurately check your debt to income ratio to evaluate the profit constituent. You can easily get a home equity loan or a second mortgage with a bad credit score too
2. Gauge the proportion of home equity you already have
3. Compare the relevant credit score with perhaps a cash-out refinancing option
4. Pick an alternative route of shared appreciation agreements
Home equity as discussed is the difference between the current value and outstanding loan amount. Under the home equity loan, the equity attached to the house is treated as collateral. This is an alternative loan set up where the monthly installments are paid above and beyond the existing home loans. If the home equity loan is duly paid back, your house can be put to auction for the residual amount.
A critical check on the credit score will be beneficial before applying for a home equity loan.
A credit score above 750 is brilliant, 700 to 749 is better, 621 to 699 is just ok, 620 and below average. Lenders would generally prefer a good credit score to provide a good credit score.
Advantages of Home Equity Loan:
1. Availing a home equity loan can get as easy as the house is provided as collateral security.
2. Home equity loans have minimal interest rates as compared to the high interest, unsecured personal loans.
3. These secure loans can be availed with a low credit score as well.
4. Home equity loan provides numerous tax benefits.
5. These loans are secure which empowers and enables a less risky proposition for borrowers and lenders.
Is it possible to sell your house with an existing home equity loan?
Typically, lenders holding a lien on the house property are paid off first from the sale proceeds. The equity loan gets paid off first with the money obtained on account of a legitimate sale.