Home Equity Loans and Poor Credit Rating

Because it is a secured loan that uses the borrower's home as collateral, home equity lines of credit are still available at affordable rates of interest to those who do not have the best credit. In fact, a home equity line of credit can be a good remedy to restoring damaged credit. Credit lenders use a scoring system to asses risk when they are determining whether or not they should lend money to both businesses and consumers. The credit scoring system provides a score for persons that have borrowed from lenders in the past. The score, known as a Credit Score is a number derived from borrowing and payment histories reported to three independent agencies. Credit lenders report your lines of credit, balances, applications for credit and payment history to the agencies. This information is then run through a mathematical formula the results in the number used as your credit score. If a consumer's credit score is lower than 600, they have poor credit and are classified as a risk. Risk, for lenders means that there is a chance that any money they lend out, may not be paid back. If a consumer is placed in the risk category it may become difficult to secure a loan, or be offered a good interest rate on any loan that they are offered. This is particularly true for unsecured lines of credit, such as credit cards and personal loans.

Since a home equity line of credit is a secured loan, using the borrower's home as collateral, the risk to the lender is reduced. This leaves lenders feeling more secure about the likelihood that they will be repaid and they will usually offer better interest rates, even to those with poor credit history. All credit activity, even secured loans are reported to credit tracking agencies and the loans status as secured or not secured is not differentiated when determining credit scores. So, making payments on a secured loan can help improve credit ratings. For this reason, California home owners looking to get a loan and repair their damaged credit may want to seek out a home equity line of credit. It is, of course, prudent to be sure that the monthly payments can be made, first so that damaged credit will be repaired and because the borrower's home is being used as collateral which means the lender may be able foreclose or put a lean on the home if the balance is not paid back in full. At the very least this would prevent the borrower from being able to sell their home and in the worst cases can result in losing their home altogether. However, if a borrower feels comfortable being able to make the monthly payments on the line of credit, then this might be an excellent option for making home improvements, paying for an education, consolidating debt and repairing damaged credit.

Another thing you should do when dealing home financing is preparing your home for appraisal. We have given tips to help you get started with the process of preparing for appraisal.