How do I try to get a homeowners line of credit with terrible credit?

April 29, 2017 1:02 PM

I did everything I could a year ago to procure my home. I got it! Now I'm drowning in the debts and deals I made to get it. Good news: my home is valued at 215K and I only owe the bank 112K. Bad news; my credit is in the toilet.

I bought the home one year ago TODAY. I got it for way below market value because of an extenuating circumstance. The place next door to me (a mirror image of my condo) just sold for 215K. I also got an tax assessor's notice yesterday that my home is now valued at 215K (last year they put it at 155K- that's a 60K jump!). I live in downtown Denver, a very hot place to own right now.

I only owe 112 on the place (bought it for 134) and would like to get SOMEthing going so I can pay down my debts. But I'm stuck in a vicious circle. I need to pay down the debts so I can improve my score but I think I need a good score to get a HELOC. I'm stuck.

I had a decent score when I bought the home after a LOT of work. But I had to do a lot of shuffling and such to really get the home buying done. Now I'm stuck owing more on credit cards, etc, than I can barely make.

Is there anyway to use my home as a resource?

And in case you're wondering: I'm not an irresponsible persons, I just can't keep up with the bills and my credit cards have suffered the worst. My credit is in the tank right now.

posted by anonymous to Work & Money (15 answers total)

Do you have housemates?
posted by aniola at 1:05 PM on April 29, 2017 [3 favorites]

Have you spoken to a mortgage broker or your bank?
posted by richb at 1:08 PM on April 29, 2017

Is selling it an option? Looks like that would be the easiest way to capitalize on its increased value.
posted by halogen at 1:13 PM on April 29, 2017 [7 favorites]

You only need one bank that will work with you. When I refinanced my house (eons ago), only one bank would consider it because we had too little equity (bought with no down payment), had only owned it a year or so, etc.

I think I called several local banks, but, these days, it is standard to start your search online:

https://www.lendingtree.com/home-equity/bad-credit-home-equity-loans-article

Look at both loans and lines of credit. You may find that a loan is easier to get than a HELOC:

https://www.nerdwallet.com/blog/mortgages/home-equity-loan-line-credit-pros-cons/

http://www.bankrate.com/finance/home-equity/home-equity-loans-helocs-available-again-1.aspx

http://homeguides.sfgate.com/can-home-equity-line-credit-poor-credit-score-9200.html
posted by Michele in California at 1:23 PM on April 29, 2017 [1 favorite]

You have to pay back the HELOC. How would using a HELOC to pay down your debt help you out?
posted by amanda at 1:41 PM on April 29, 2017 [7 favorites]

It is usually a bad idea to borrow money to pay off debt. Rarely, it makes mathematical sense, but it's still a bad idea, because human nature . Selling your house is the best way to capitalize on your equity in it.
posted by so fucking future at 1:54 PM on April 29, 2017 [4 favorites]

If you have no intention of selling your home then you need to figure out how to cut your expenses. Do you have room for a housemate? Can you do airbnb, legally? Can you get a part-time second job? If you're making car payments can you get rid of the car and use public transportation? Find ways to spend less.

One advantage of getting a HELOC or a straight Home Equity Loan would be that the interest works the same way as a mortgage's interest works for your taxes. If you can get a fixed rate straight home equity loan you'll be safer than with a HELOC with a variable rate. Then you really need to use it to pay those debts, and not spend it on other stuff.

Just because you have a lot of debts doesn't necessarily mean your credit is bad. Have you actually checked your credit report? Have you signed up for creditkarma.com?
posted by mareli at 2:23 PM on April 29, 2017 [3 favorites]

Oh, and have you signed up for the homestead exemption so that your taxes on your home don't get too high?
posted by mareli at 2:25 PM on April 29, 2017 [1 favorite]

I just don't think there's enough information here to help you. Generally to improve your credit, you pay down debts. Generally to pay down debts, you cut expenses or increase income. I'm not really sure how a HELOC is going to help you. All it does is consolidate and transfer your debt. You need to address the fundamentals to actually pay down the debt, regardless of who owns it.
posted by DarlingBri at 3:23 PM on April 29, 2017

For all the people saying a HELOC can't help, it can if your credit card interest rates are extremely high. However, you have to be absolutely 100% sure that you will stop using your credit cards no matter what.

Is there a credit union you're eligible to join? I would try to find one and talk to people there. They tend to be more interested in actually helping people. If you're not eligible for a loan, they can probably point you to a credit counseling organization that isn't a scam.
posted by FencingGal at 3:37 PM on April 29, 2017 [3 favorites]

I'd be more inclined to get a zero interest credit card, transfer the balances and then work to pay off within the offer period as much as you can. You could also look at a cash out refinance - you'll find out pretty quickly whether your credit is an issue. And definitely pull your credit reports and see what they say. Then do a little research about how to improve your score.
posted by amanda at 3:54 PM on April 29, 2017 [3 favorites]

You might also find the book "How to get out of debt, stay out of debt and live prosperously" a useful resource for tackling your debt problem generally. It may also help you think through which answers here (such as suggestions to sell the house vs. answers on how to refinance) are most pertinent to your specific situation.
posted by Michele in California at 4:11 PM on April 29, 2017 [1 favorite]

Stop spending. Get as frugal as you can and still survive. Full student style.

Those old worn out shoes...stretch their life for another month. The socks with holes? Another month.

No eating out.

Everytime you spend money you actually spending that dollar plus the interest you will pay on one dollar of debt until you are completely debt free.

Understand your debt. Use this google docs debt reduction calculator spreadsheet so you can see the real cost of your spending. This can be daunting but it can also give you hope by letting you see the effect of positive changes that you make. I added a page on mine where each month I put in the amount I would have paid in interest at the start and at the end so I could see the long term impact of the extra payments I made on debt. It was pretty damn motivating to see hundreds of dollars of interest payments being shaved off. If you have a partner share this info with them as well as it will motivate them as well.

Sell off the stuff you own that you don't need. That book collection? Liquidate it. CD collection? Liquidate it. Rarely used home appliances? Liquidate. Put the money you earn from this directly and immediately onto your debt. When you are drowning in debt every single thing you own that you can get money for is costing you money simply to hold onto. You can usually free up a couple of thousand dollars from selling off extra stuff and this might be enough to halt the snowball from expanding. Those things that you think you will miss you probably won't and if you do you can buy them again when your financial situation is better.

Likewise get rid of the money sucking remoras. Cancel Cable TV and get back more than a thousand bucks a year. Downgrade your internet to the lowest viable speed and get a couple of hundred a year back. Switch to the cheapest mobile phone plan.
posted by srboisvert at 8:48 PM on April 29, 2017 [3 favorites]

One more thing: Don't be embarrassed or ashamed of your situation. It is pretty normal. There are pretty powerful forces acting against you being solvent.

4% of mortgages are currently delinquent (9 months behind in payments) - that is 1 in 25 - and apparently FHA mortgage delinquencies are spiking this year.

The default rate is also slowly creeping up since May 2016 to about 0.75%

In 2016 average household credit card balance was $16,000 (at 14% that would cost $2240 per year to carry - at 22% that would cost $3520/year).

8.4% of all car loans have a missed payment in their first year.

Somewhere around 1/3 of all Americans struggle to meet their financial commitments. 50% don't have $500 to spare for an emergency.

Be open about your struggle to the people you spend money around and on. Let them know you need to cut back and ask them to help you not go overboard.
posted by srboisvert at 11:21 AM on April 30, 2017 [2 favorites]

All of the above, and cut up the credit cards.

Seriously. If you need to charge it, you can't afford it.
posted by BlueHorse at 8:46 AM on May 1, 2017