Your home equity is a valuable resource you have if you own a house. However, even though you might have had no trouble getting your initial mortgage, you will need to reestablish your creditworthiness if you want a home equity loan. This implies that one of the determining variables between acceptance and refusal is your credit score.
What Is a Home Equity Loan?
A home equity loan is, as its name suggests, a loan that is backed by the equity you have built in your house. Your equity, or the gap between your debt and the value of your property, increases with each mortgage payment you make. Your equity is also increased if the value of your house rises. Second mortgages are another name for home equity loans.
Your creditworthiness will be assessed by the lender when you apply for a home equity loan using a number of criteria, including:
- Employment history
- Credit score
What Is a Credit Score?
Although each of those indicators is significant, it may be the easiest for lenders to measure your credit score. The majority of lenders utilize your FICO score and at least one of the three main reporting agencies—Equifax, Experian, or TransUnion—to get your credit report.
Five factors are taken into account while calculating your credit score:
- Your payment history: 35%
- The amount you owe across all accounts: 30%
- Length of your credit history: 15%
- Credit mix, such as retail accounts, auto loans, mortgages, and credit cards: 10%
- New credit: 10%
If your credit score is good enough, lenders will presume that you have a history of making on-time payments and managing your money responsibly.
What Credit Score Do You Need?
Typically, credit ratings are divided into five levels:
To accept a home equity loan, the majority of lenders want a credit score in at least the excellent range, with a target of 700.
However, the reduced interest rate you can be eligible for depends on your credit score. So when you’re interested in borrowing, being careful with your money might pay off.
There’s still hope if your credit score is below 700. Some lenders will examine your creditworthiness more carefully, taking into account additional elements including your debt-to-income ratio. If your score is really low, you might try to raise it before submitting an application for a home equity loan.
How To Improve Your Credit Rating
Examining your credit reports to identify what is lowering it is the first step to improving your credit score. Through the official website AnnualCreditReport.com, you may get free access to your credit reports from each of the three credit reporting agencies once a year.
Contact the reporting agency to inquire about any fake accounts or debts that have been paid but not cleared.
Since your payment history accounts for a large portion of your credit score, paying your credit cards, vehicle loan, or first mortgage on time might boost it. Make up any unpaid invoices you may have. Lenders can tell that you pay your payments on time and regularly if all of your current accounts are in excellent standing.
Paying down high-balance accounts is another approach to improve your score. By paying them off, you lower your credit usage ratio, demonstrating that you have access to additional credit and aren’t, for instance, maxing out your credit cards. Requesting a credit line increase is another strategy to lower your credit usage rate; the more room you have between your debt and credit limit, the better. A credit usage rate of under 30% is ideal.
How long does credit score restoration take?
There isn’t a quick treatment for bad credit, but if you start working to raise your score, it may take months to see results. Negative marks on your credit record, such as late payments, collections, or bankruptcies, remain there for seven to ten years.
Do You Automatically Lose Eligibility for a Home Equity Loan If You Have a Low Credit Score?
No, not always. Even while a score in the bad range will likely reject you, some lenders will consider additional considerations if your score is in the lower range of the excellent scale or high fair. Even if you are accepted, your interest rate will probably not be as low as it would be if you had a higher credit score.
Will You Qualify for a Home Equity Loan If You Qualify for Your First Mortgage?
Lenders of home equity will base their choices on the state of your credit right now. Therefore, if you’ve kept up a good credit history since getting your first mortgage, you could be in the clear. But if your track record has since gotten worse, you can run into trouble.
Many opportunities are opened by having good credit, especially in the lending industry. You’ll need strong credit if you want to use the equity in your house as collateral for a cash loan. You’ll need great credit if you want a lower interest rate on that loan. Get a copy of your credit reports and check where you stand before applying for a home equity loan.