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Home Financing 101

Can You Access Home Equity with Bad Credit?

7 min read
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picture of author, Hometap TeamBy Hometap Team on September 4, 2018

So many Americans struggle with debt. A survey conducted by Hometap in 2019 of nearly 700 U.S. homeowners showed that while many homeowners are house-rich, they’re also cash-poor, with little day-to-day liquidity. Survey takers indicated if they did have debt-free access to their home’s equity, they’d use it to pay off credit card debt, medical bills, or even help friends and family pay off debt.

Many homeowners responded that they haven’t even considered available options to tap into their home equity. In short, they feel stuck because available financial options only seem to add more debt and interest to the homeowner’s monthly balance sheets. There’s also the issue of qualification and approval, as it’s hard to meet the requirements of many financing options, like a home equity loan, with bad credit.

The good news? This “house rich, cash poor” status quo doesn’t have to continue. Learn about the importance of credit, and how you can still access your home equity if yours is less than perfect.

What Is Credit and Why Does It Matter to Lenders?

Credit refers to the ability to to borrow money, obtain products, or use services while agreeing to provide payment at a later time. The term “credit score” refers to a three-digit number that indicates the level of trustworthiness you’ve demonstrated in the past through experience with creditors, lenders — basically, any company who has given you money. This information is gathered in a credit report through a variety of different sources, including the amount of credit cards you have, along with any outstanding balances on them, your history of loans and repayment behavior, timeliness of monthly bill payment, and significant problems like bankruptcies and foreclosures.

Simply put, lenders want to be as sure as possible that you’ll pay back any money they give to you, and checking your credit is an easy and relatively comprehensive method to gather this information.

If you’re carrying a lot of debt and are worried about your credit, you may think that your home equity is inaccessible. But you may be surprised at what you can access. Here are a few ways you can tap into your home equity to start using that liquidity to reach your financial goals. ‍

Chart depicting good and bad credit

Cash-Out Refinance

A cash-out refinance is when you, the homeowner, take out a new, larger mortgage, pay off your current mortgage, and use the excess to fund your needs. This can be done through your existing lender or a new lender and is not considered a second mortgage. According to Bankrate, you typically need at least 20% equity in your property to qualify, and you’ll pay interest on the life of the loan (usually 15 or 30 years). Because of the long duration of a cash-out refi (as they’re commonly known), you’ll want to ensure the interest rate and your expected repayment plan fit into your monthly budget. Homeowners are typically required to have a credit score minimum of 620 to be approved for a cash-out refinance.

Home Equity Loan or Home Equity Line of Credit

Would you qualify for a home equity loan or a home equity line of credit (HELOC) with bad credit? First, you need to know the difference between these two home equity options.

A home equity loan allows you to borrow money using the equity in your home as collateral, typically in a lump sum with an interest rate that is fixed. A HELOC, on the other hand, while also using the home as collateral, works more like a credit card, in the sense that you can draw funds on an as-needed basis. A HELOC often has a variable interest rate. With both home equity loans and HELOCs, your credit score and home equity value will play a part in how much you’ll be able to borrow and your interest rate.

The minimum credit score needed for a home equity loan and a HELOC are usually at least 620, though it depends on the lender. But even if you don’t meet this minimum credit score for a home equity loan or HELOC, you shouldn’t be discouraged. Julia Ingall with Investopedia says homeowners with bad credit should comparison shop for lenders open to working with borrowers like them. Additionally, Ingall notes that working with a mortgage broker can help you “evaluate your choices and guide you to reputable lenders.”

Home Equity Investment

A home equity investment offers homeowners the ability to tap into the future value of their home in order to access their equity now. A home equity investment is a smart way to do just that.

At Hometap, homeowners can receive home equity investments so that they can use some of the equity they’ve accumulated in their home to accomplish other financial goals . The homeowner gets cash without having to sell or take out a loan; and there is no interest and no monthly payment. Another positive aspect of a Hometap Investment is that hundreds of factors are taken into consideration to approve an applicant — credit score isn’t the defining criterion.

Sell Your Home

For many, it’s a last resort, but homeowners with poor credit can access their home’s equity by selling it outright. Of course, this decision is predicated upon finding a more affordable house for your next home, including favorable mortgage terms for your new place, and ensuring you don’t spend too much on real estate fees or moving costs. You also may be able to improve your credit score before you reach this point. Monitoring your credit score to keep an eye out for potential disputes and discrepancies, maintaining a balance well below your credit limit, and keeping old accounts open are all good places to start.

If you’re feeling house-rich and cash-poor like so many Americans, you now have a host of options to access your home equity. As with any major financing decision, consult with a trusted financial professional to determine your best course of action, and get moving toward your goals.

See if you prequalify for a Hometap investment in less than 30 seconds.

You should know

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Hometap is made up of a collaborative team of underwriters, investment managers, financial analysts, and—most importantly—homeowners—in the home financing field that understand the challenges that come with owning a home.

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