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Bad Credit Equity Loan Approval – 5 Tips For Getting Loan Approval

Becoming a homeowner involves an initial investment – in the form of a substantial down payment – as well as an ongoing investment commitment. For most people, that ongoing commitment is a full 360 months long – a long time!

For the first few years of making your mortgage payments, almost the entire payment goes toward paying the interest on your loan – while very little goes toward paying down your principal balance. However, at some point you find that you have made some substantial progress toward paying down your loan principal. At that point, if not sooner, you have built up some equity in your home.

Equity can be defined simply as the difference between your home’s value and the amount you currently owe on your mortgage loan. As a homeowner with equity, you may be in the position to borrow against that equity in the form of an equity loan, using the resulting cash however you see fit.

However, if you have a bad credit score, by approaching most lenders you may be facing somewhat of a challenge in terms of what you can qualify for – if you can qualify at all. If you are interested in getting bad credit equity loan approval, here are 5 tips for getting loan approval:

1. Understand what it takes to qualify for an equity loan:
As mentioned above, you will need to have some equity in your home in order to take out this type of loan. To figure out whether you do, just subtract your current mortgage’s outstanding balance from your home’s current market value. Next, you will need to determine how much you can borrow from the typical lender.

2. To find out how much you can likely borrow, determine your LTV ratio:
Most mortgage lenders prefer to extend home equity loans whereby the resulting loan-to-value (LTV) ratio is no more than 80%.
To determine your would-be LTV, start by determining how much you owe on your existing mortgage balance. Let’s call that M. Now, estimate the current value of your home if it were to be sold on the market today. Let’s call that V.

For an 80% home to value loan, here is how to calculate how much you can borrow:

Maximum you can borrow in home equity loan = (V x 80%) – M
Meanwhile, for a 70% LTV loan, calculate it this way:
Maximum you can borrow in home equity loan = (V x 70%) – M
As long as the result is greater than zero, that is how much you can borrow with that type of loan. What if you need to borrow more than an 80% LTV loan allows? Don’t panic. Some banks are willing to extend 100% or even 125% LTV loans.

3. Become familiar with your credit report:
Now that you know how much you may be able to realistically borrow, it is time to become familiar with your credit report. Go ahead and request your latest report from Experian, TransUnion and Equifax. Find out not only what your exact credit score is on each report, but also go through each report and take notes on any outstanding items. You may want to be able to explain these to a would-be lender.

4. Prepare employment documentation:
As you start applying for loans, you will want to approach not just any given home loan lender. Rather, you will want to approach bad credit equity loan lenders, in particular. These lenders are specialists in looking at not only your credit score, but a number of other factors – including those on your credit reports (see #3 above) to determine whether you represent a creditworthy borrower. One of these factors could be your employment history. Prepare any documentation that shows your current and/or recent employment status details in case you are asked.

5. Widen your field of choices when applying:
Make sure that as you seek out bad credit equity lenders you apply to at least 4-6 lenders. Why this many? Because, while you will likely be tempted to accept the first loan offer you receive, it is a very good idea to follow through with applying to other lenders. It may be that the last one you apply to is the one that offers you the best interest rate.


October 19, 2010 - Posted by | Debt Consolidation Loan

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