Bad credit home loans are a rather vague concept, since they can refer to one of two things: either a loan taken out to buy a new home (otherwise known as a mortgage) or a loan taken out against the equity in a home you already own (known as a home equity loan). Whichever you mean though, the ‘bad credit’ part is the part that’ll cause the ears of your nearest bank or major lender to prick up – with all kinds of home lending becoming increasingly difficult to get in the current economic climate, it’s not surprising that people with poor credit ratings are finding it hard to get the home-related money they need.Of course, there are always ways and means of finding someone willing to support your application for a bad credit home loan; you just need to be extra careful that you’re not putting yourself in a position where you could ultimately lose everything. In the case of home equity loans, this is especially important since you’re essentially putting your entire home at risk against whatever equity you’re releasing (with equity being the difference between the amount you owe on your mortgage and the actual value of the property). That’s assuming you’ve got any equity available to release, of course – with house prices at a serious low, many people are finding that their homes are actually worth less than what they owe on them!Unfortunately, freeing up equity on your home while you have a poor credit rating isn’t exactly easy, since major lenders will usually turn you away immediately; this leaves you having to approach specialist lenders offering incredibly high interest rates and loans that may be beyond your affordability, which is often the cause of people falling behind on repayments and losing their homes. As such, it’s vital that you explore all your options – for instance, a Bad Credit Loan may be a better solution since you could be approved for one without putting your home at risk.Getting a new mortgage while suffering from bad credit can also be very hard, especially since the interest rates being offered and deposits required are often so high that they’re unobtainable by many people. That’s not to say it’s impossible to buy a home if you have bad credit but it may be smarter to repair your credit rating first, possibly through a loan or a credit card designed to help people raise their credit score. In the case of a Bad Credit Loan, you could even borrow the money and put it straight into a high-interest bank account, then leave it there to build up some interest – then when you’ve paid off the loan, you’ve got a ready-made deposit for a home just sitting there for you to use!In SummaryA bad credit home loan…Can either be a mortgage taken out with bad credit or a remortgage to free up home equity
May be difficult to get from banks or major lenders due to your credit rating
Will likely have higher interest rates to protect the lender from the bad credit risk
Puts your home at risk if you fail to make repayments (in the case of an equity loan)
Needs serious consideration, since it’s a long-term borrowing commitmentCopyright: Individual Finance, 2010