Advice - need equity loan with low credit score but major equity

8 Replies

Hello BP,

I have a cousin who owns a home in Downtown DC in a very trendy and expensive Neighborhood called the U Street corridor, and he is trying to get a home equity loan for $80000, but his High credit score is only 536. the home has a current mortgage of $550,000 but the property value is estimated at $1.400,000. I was wondering if the community had any suggestions on what type loans he could get with a score so low. I had someone suggest an Alt-A loan, but want to hear from the BP community. The ultimate goal is to pull the money out, and clean up his credit to raise his scores over the next 6 to 12 months, and then refinance again, and get enough out to totally renovate the property into a duplex, so he can live in one unit and rent out the other.

A hard money lender would take this deal.  A bank that specializes in investor rehab loans might if there is a good story to explain the low credit scores.

@Jerry Collins It's possible you could find a lender who would consider this, should his income show enough strength to handle the additional expenses of a home equity line.. If your cousin has a cosigner with better credit, that may also help him access a traditional HELOC

If this is a non owner occupied property currently, it's likely a hard money/bridge lender would consider financing this as well- just expect higher than conventional rates (8-12%) with interest only payments and 1-2 year terms. Usually these lenders will offer 55-65% of appraised value, with a fund controlled release on any renovation work needed to be done. At $1.4M renovated value there seems to be enough equity to help realize your cousins game plan.

He tried to go to one Hard Money Lender in the area, and they didn't want to lend him the money, and he was using his fiance as a co-signer. The thing is she makes over $100,000 a year salary, but her credit is just as bad as his. I just received a copy of his report today, and he just needs to pay off delinquent accounts. I did not think with so much equity in his home he should have to go to a hard money lender, but I think after your comments, that  it might be the only answer in this situation, so I think I will seek out some Hard lenders through BP in our area and see if he can get the money and pay off his debt. Thank you guys for responding to my post.

We regularly see posts asking why conventional lenders don't lend to borrowers who lack the ability or discipline to manage their finances.  They don't lend because they have decades of statistics that show a good portion of these borrowers don't pay their loans back.  Will some people sell their house with the equity to make the mortgage payment?  Yes.  Will all of them?  Absolutely not.  Keep in mind that interest rates are near 5%.  After the lenders cost of funds and administration costs, they are making, let's say 1-2%, profit on the loan.  That leaves very little room for defaults and borrowers with low credit scores have a high historic default rates.

And having a co-signer with poor credit is just silly and it builds the case against lending.  So does owning a $1.4M home but having credit challenges.  We're missing part of the story.

Sorry for the tough love but lenders are in the business to make money and lending to borrowers with bad credit is a losing proposition for all parties...the lender, the borrower, and the general public.

If he is living in it HML generally will not make owner occ loans because of licensing and dodd frank issues. and then your conventional lenders number one thing is fico.

this is a friends and family loan.. you need to loan him the money.. you take the risk.

but generally speaking to have both parties with crappy credit unless its a health issue.. is simply an indication of someone with challenges prioritizing the realities of life..

@Jerry Collins I will have to agree with @Mike Dymski . There is a reason why lenders don't lend to borrowers who either lack the ability or have exhibited a lack of discipline in managing their finances. Simply put, they are in the business of avoiding non-performing loans. 

There are more studies out there than you and I care to go over that shows low credit scores being directly correlated with a lack of ability to pay back debt. Obviously, it does not apply in all cases it does in most. Lenders are in the business of avoiding silly mistakes especially in the aftermath of the 2008 crisis. 

Plus, why would you anyone have a co-signer with a poor credit? It just ensures that even more lenders will avoid making this loan. 

Thanks for all the love, tough and all. I totally agree with everyone, that making a loan to someone with really poor credit is just crazy, but let me clear up something for @mike Dymski. The home is one he grew up in,  and was turned over to him by his mother after she fell ill, so it is at that value because of the development in the area. I also agree totally with @Omar Kahn because I was one of the many that lost money during the 2008 crisis. I didn't expect an easy solution when he came to me and asked for assistance, followed by that copy of his credit report, that's why I presented it here on the forum to get some feedback and any creative ideas. I appreciate you all for taking the time to respond.

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