What Can You Do if You Want a Home Equity Loan and You Have Bad Credit?

Bad credit is one of the scariest phrases to consumers. Credit is used as a surefire way to judge the financial responsibility of a particular individual. Having a bad credit rating inspires a similar reaction among lenders to the reaction that parents of wayward daughters used to have: “Never darken our door again.” This makes bad credit something of a taboo in modern polite society. This is unfortunate, since quite a few cases of bad credit have nothing to do with the borrower’s financial responsibility, or lack thereof as the case may be. Sometimes there are simply things that borrowers cannot control that result in their credit rating going down.

For example, a common scenario today is for a borrower to suddenly find his liabilities worth more than his assets due to deflation. This is especially true since the downturn of 2008 began in earnest. Depending on the creditor, this presents two options for the debtor: the creditor can write the unpaid debt off as a loss, in which case the borrower essentially is freed from his debt; or the creditor can sell the debt to a collection agency, which is the worst option. Collection agencies are known for blatant harassment of consumers with bad credit whose debt has been sold to them.

Collection agencies do not present quite the same problem to people who find their home ownership called into question. During economic crises such as the current one, lenders may raise interest rates or monthly payments in an attempt to reduce their elevated risk. This, in turn, represents a dire situation for borrowers who were counting on the interest rate on their loan remaining low. Once a borrower has their credit score lowered, there is precious little they can do to immediately recover from it.

Depending on the type of loan, borrowers are faced with little in the way of an approved application. Home equity loans, being the second most popular type of loan, are easier to get approved for than mortgages. This is because equity is determined by taking the balance of an existing loan, typically a mortgage, and subtracting that from the total value of the house. So without a mortgage or other debt instrument already outstanding, a homeowner is not likely to get a home equity loan since there is nothing to use to calculate any equity that might be present.

For home equity loans bad credit is a surmountable obstacle. All the borrower needs to due is show financial responsibility through alternative means. Saving enough money for a large down payment, at least sixty percent of the expected amount, is an excellent way to accomplish this. A co-signer with good credit also really helps. There are many options for homeowners with bad credit to consider. Do not give up simply because of bad credit.

Matthew M. Wilson is an online freelance writer who owns and operates Loan Money Info http://loanmoneyinfo.com, an online resource about loans, mortages and money in general.