Home Improvement Loans for Bad Credit: About Home Loan Pre Approval

Home Improvement Loans for Bad Credit: About Home Loan Pre Approval

Posted 07.03.2012 in Articles by Jess

Still day dreaming of remodeling your kitchen to look exactly how you've always pictured it? Or how about building that wrap around back deck just in time for summer? Do you keep putting it off because you or your partner has a bad credit score? Some homeowners use their own money or credit cards for home improvement projects, but credit cards usually have high finance fees and some people don't have a sizable savings account. The solution? A home improvement loan. While there's a high chance of loan denial with bad credit, there's no need to be discouraged because it's not impossible with a few of these tips and keys.

Using personal property as collateral is often a reliable way to secure home improvement loans for people with damaged credit. The collateral may be a vehicle title, jewelry or electronics. Essentially, this collateral can be nearly any asset that the borrower owns free and clear. This method can often help borrowers with bad credit obtain a loan because it reduces the lender’s risk.

Another form of collateral that may make sense is the borrower’s home equity. Homeowners can tap into their property’s equity with a variety of home equity loans. The first of these is a cash out refinance. In this method, the entire mortgage is refinanced with an additional balance being added to cover the cost of the home improvements. At the closing of the refinanced loan, the borrower receives cash to complete their renovations. This can be a particularly attractive option if current mortgage rates are lower than that on the existing mortgage.

Other homeowners go with a fixed rate second mortgage. In this approach, the first mortgage is left intact, and the borrower takes on a second mortgage payment, which also may be called a home equity loan. The lump sum of the second mortgage is received by the borrower upon closing, which is preferable for homeowners who need a larger amount of money up front.

The home equity line of credit is perhaps the most flexible of these home improvement loans. A line of credit functions similarly to a credit card in that the borrower may access the funds at any time. They may use the funds, pay them back and then use the funds again for another project. They pay interest only on the amount of the credit line that they are using. This method makes a great deal of sense for homeowners who will be making improvements over a long term.

When a borrower has bad credit, using collateral is not their only option for obtaining a home loan. Home loans for bad credit risks are generally available for borrowers who use a cosigner. A cosigner is a reliable person who possesses a good credit history. Having their signature on the loan effectively reduces the lender’s risk because they are essentially saying that they will be responsible for the loan should the primary borrower fail to pay. Most cosigners are close friends or family members who know the primary borrower well and have confidence that they will be able to pay back the loan. This is important because if the primary borrower does not pay back the loan, the cosigner will become liable for any amount owed. Additionally, a cosigner accepts that their credit report may be adversely affected as a result of signing on home loans for bad credit risks. 

Although the cosigner must be willing to accept liability, having a cosigner is still a great way for a person with bad credit to obtain a home loan. A bad credit score generally means higher interest rates and fees, but having a cosigner can reduce those rates and fees. It is unlikely that the rate will be as low as that offered to a person with an excellent credit score. However, even a minor reduction in the interest rate can translate to thousands of dollars saved over the life of the loan.

Most people who already own a home choose to refinance when they need extra money to make home improvements. Refinancing makes sense when it does not incur additional costs, or incurs only minor costs. It also makes sense when a homeowner is dealing with an adjustable rate mortgage or has a balloon payment looming on the horizon. In either of these instances, a savvy refinance can save the homeowner a substantial amount of money. Consumers should exercise caution when refinancing would add significant time to the terms of their mortgage, as this will end up costing the homeowner thousands of dollars over the life of the loan. 

When a consumer whose credit is less than perfect decides to get a home loan, they will likely have to spend quite a bit of time searching for a lender. It’s discouraging to discover that some lenders refuse to work with borrowers who have bad credit. Nonetheless, there are other lenders who work only with clients who have bad credit and still other lenders who work with a wide variety of customers. Finding such lenders can be tricky. Consumers experiencing a great deal of difficulty might consider working with a mortgage broker. These professionals are adept at connecting borrowers of all types and descriptions with suitable lenders. A broker generally has excellent professional connections, and knows of a wide variety of lenders of which the average consumer may not be aware. Still, it’s important for the consumer to take their time and perform careful comparisons of the components of each loan before signing on the dotted line.

When a prospective home buyer has damaged credit, it’s particularly important that they seek home loan pre-approval. This process tells the buyer exactly how much they have to spend on a house before they start looking. When the buyer knows their home loan pre-approval amount, they won’t waste time looking for homes that are outside of their price range. Shoppers with pre-approved home loans also benefit from having a stronger negotiating position. When they put a bid in on a property, the current owner knows that the potential buyer’s money is a sure thing. This really reduces the stress involved in buying a home, and greatly simplifies the process.

Acquiring a loan for a home improvement project may not be easy for people who have bad credit. However, using collateral and cosigners can be excellent methods to secure the necessary loan. Additionally, many homeowners choose to tap into the equity in their homes by refinancing a current mortgage. With the help of a broker and the potential for pre-approval, getting a loan is easier than many consumers realize.  


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