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What You Need to Know if You Have Bad Credit and Need an Equity Loan...

If you're in a situation where you need to take out some the equity in your home, but traditional lenders/banks are rejecting your application - this article will clearly describe your options...

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Here are some examples of situations that might require a home equity loan when you have bad credit:

• Your home is in need of much needed repairs
• You would like to put in a suite in your home thereby creating rental income
• You’ve come across a real estate or business opportunity too good to pass on
• You’re facing a short term cash crunch due to illness or job loss
• Due to an illness or job loss you’ve amassed a bunch of credit card debt and the payments are killing you financially
• Your business needs a short term cash injection
• You need money to pay the government back taxes that you owe them
• You need money to continue a legal action that will result in a large cash settlement, but you need the money to help you get to the finish line

Plus many more...

About the Lenders

In this situation - where you have bad credit and need an equity loan - they are private lenders and not the banks. These folks lend primarily to those with less than perfect credit.

Secondly not all private lenders are created equal, if you are mortgage shopping and you have bad credit, watch out for the predatory mortgage lenders who will gouge you! You can’t expect with less than perfect credit to get great rates but in spite of bad credit, within this lending community there are some “norms” when it comes to fees and rates. In order to find out what those are, make the calls and do your homework upfront to ensure that you end up with what is fair in the end.

Typically these types of lenders can arrange a home equity loan for single family homes, commercial property, construction projects, developer lots, raw land, unimproved & improved property of all types. They do “outside the box” lending.

When it comes to the home equity loan their focus is primarily on both the collateral and the fundamental value of the real estate in question, in other words with private lenders your equity is the key to the deal. They are typically very creative and usually act quickly. Their home equity loans are generally interest-only loans thereby making the payments more manageable.

Most of them don’t generally have any kind of a minimum credit score requirement, and most if not all generally lend anywhere between 65% to 75% of loan to value, now I’ve heard of some going as high as 85% but this is the exception certainly not the rule! They will lend in first, second and even third position in some cases so long as the loan is structured within their loan to value guidelines. In most cases these folks work with mortgage brokers and form part of a mortgage brokers lending network.

They don’t care what you do with the money, most of the banks and credit unions and trust institutions want to know how and what you’re planning on doing with the money but not private lenders. What they will care about however is how their funds are going to be repaid back, so in this regard they act very much like a mainstream bank - they are in the business of lending money not having to chase after it!

About the Costs

Be prepared to pay more in interest rates, these home equity loans are more expensive than the traditional ones because they are not based upon traditional credit guidelines which protect the banks from high default rates. Because private lenders don’t usually ask for the documentation and income verification that typical lenders do, they experience higher default rates (and, thus, charge a higher rate of interest).

In addition there may also be lender fees, brokerage fees and legal and appraisal fess which you will also have to pay. But as mentioned before ensure you shop around and clarify all of these costs upfront before signing thereby avoiding any unpleasant surprises!

Do This - And Save Thousands...

Make sure you can make the payments! Now many of you are thinking, who would be crazy enough to go into debt not knowing if they can or can’t afford to make the payments you would be surprised! In fact a fair amount of borrowers who get into trouble do so because they don’t have a monthly budget! That’s right, it’s not only this one payment you have to worry about, it’s all of the rest of your financial obligations. Surveys and studies have proven that more than 80% of individuals today don’t have a monthly operation budget, that’s like driving at night without headlights! So before you borrow the money, make the budget! You don’t want a financial “wreck”.

Have a clearly defined exit strategy. Now I know that you don’t want to pay the typical high interest rates that these loans come with forever, right? That’s why these loans should never be viewed as anything other than short term due to the interest rates, there should always be an exit strategy going in. So what’s yours? What’s going to change during the term of this loan that’s ether going to allow you to pay it off completely or get it refinanced at normal rates?

These are things that need to be clearly established before you move ahead with a private loan.

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.



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