Poor credit can affect your ability to access home equity, but it doesn’t make it impossible. An FHA home equity loan isn’t one of your options, however because they will only back first-lien mortgages. Read on to learn more about the options you have, and how to help your credit score improve to increase your odds of approval.

HEL and HELOC

While the FHA doesn’t back home equity loans (HEL) or home equity lines of credit (HELOC), it won’t prevent you from obtaining one if you have an outstanding first-lien mortgage. Both an HEL and a HELOC can be obtained in spite of poor credit because your home is put up as collateral. The lender assumes that you understand that you have done your research and understand the risk before signing.  

However there are still some requirements you must meet for both of these.  The average lowest accepted credit score is 620, and lenders will rarely go below 580. Scores above 720 will have the best options available to them. They will also need to know your ability to repay the loan, which is determined by your debt-to-income ratio and available assets you have. Lastly your available home equity.  It’s preferred you have at least 10%, which allows you to borrow between 80-90% of your home’s value between your first mortgage and the loan.  This is called the loan-to-value ratio.  

Alternatives

If neither of these options are available or suit your financial needs you may want to consider a cash out refinance.  This allows you to refinance your existing mortgage while simultaneously receiving the cash out at closing. An FHA 203(k) loan is a first mortgage that lets you both purchase or refinance a home and the cost of alterations made.  However this can only go towards things to make the home safer, stronger, and more easily accessible such as energy conservation, replacing plumbing, and improving its overall appearance.  It cannot be used for luxuries like installing a pool.   

Improving Your Credit Score

If you’re having trouble finding a lender who will approve the loan because of your bad credit, improving your credit is the next thing to do. First and foremost you should obtain a free credit report. You can look at the various open accounts and lines of credit you have that are affecting your score and come up with a plan to make it better. Blindly throwing money at outstanding debt and ‘going on the offensive’ may sound like a good strategy but it might hurt you in the long run, especially if the account has accrued so much interest that you don’t make a dent in the principal balance. You may have a hard inquiry from signing a contract for a new phone, using a debit card on a rental car, and other seemingly unrelated financial activity. Human error may negatively impact your score and you will need to dispute it.

Contact us at (605) 718-9820 or schedule a call and let our mortgage experts help you with your home loan.

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