The subprime home equity loan was designed for borrowers with lower credit scores. There is a limit to your score as if your credit score is too low you won’t be entitled to any kind of mortgage.
Most people can not afford a loan due to their low credit score but there are other ways to get a loan which we would find out in this article.
What is a home equity loan
A home equity loan is a guaranteed home equity loan for bad credit where you use your house as collateral for collecting loans. This happens when you have a bad credit score and so the lender requests huge collateral in case the borrower defaults.
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Subprime home equity loans
Subprime loans are guaranteed home equity loans given to borrowers with low credit. Usually, it is common for lenders to deprive people with bad credit scores as they are likely to find it difficult to pay back the loan. It is important to note that the interest for this type of loan is usually high.
The prime interest percentage for prime buyers with an acceptable credit score of 3.25%. The subprime interest rate is usually higher as a result of the bad credit score the borrower has. The risk taken by the lender results in a high-interest rate as borrowers may default when it is due to pay back the loan.
Types of subprime home equity loan
We would learn about the four types of subprime loans namely:
- Interest-only loan
- Adjustable-rate loan
- Fixed-rate loan
- Dignity loan
Interest-only loan
An interest loan is a type of loan that permits mortgage borrowers to pay only the interest at the early stage of the loan payments. The system makes it easy and affordable for the borrowers to pay when it is expected of them too.
Adjustable-rate loan
The adjustable-rate loan Is known to stay steady for the first few years before it changes to a floating rate. For instance, if the loan is meant for 20 years, a flat interest rate is to be paid in the first 2-3 years at a fast pace.
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Fixed-rate loan
As the name implies, it is a fixed-rate loan that allows a fixed interest rate throughout the period of the loan. The duration of the loan is reasonably higher and it has a validity period of 30 years. With a fixed rate, it could be 40-50 years.
Dignity loan
Dignity loan allows the borrower to submit a down payment which is equivalent to 10% of the loan with an agreement of a higher interest rate for the actual percentage of the loan and it requires payments to be made on time for a 5-year duration. Furthermore, the paid interest lessens the balance of the loan.
How to avoid defaulting
To avoid defaulting on the guaranteed home equity loan for bad credit you should follow these steps below:
- When drawing your monthly budget make sure you create a budget for the loan payment.
- Work on your bad credit score .
- Ensure you pay when due to improve your credit score.
- If you have a friend or family member with high credit score you should consider asking him or her for a joint effort in paying back the loan.
- If you find it difficult to pay because of the high interest you should consider looking for other lenders to assist you in paying the loan.
Minimum credit score for Subprime home equity loan
There is a limit to a credit score for a guaranteed home equity loan for bad credit. The borrower shouldn’t have a credit score less than 680. Usually, the credit scoring systems range from 300 to 850 others are 900 or 950.
The maximum credit score that you can have is 850. If you have a late 700 or 800credit score you will be able to go through the process for the loan.
Take a look at the range of credit scores below:
- 800 to 850 – Excellent
- 740 to 700 – Very Good
- 670 to 739 – Good
- 580 to 699 – fair
- 300 to 579 – poor
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Conclusion
It is important to know which credit score you belong to and if it is considered low look for a friend or family with a higher credit score or income to help boost your credit score.
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