Obtaining a home equity loan after a bankruptcy can seem particularly difficult. However, it is by no means impossible for someone who’s willing to take time to explore options offered from different lenders. Here are some things you should know about getting approved for a home equity loan after bankruptcy.
The term “home equity loan” typically refers to a second mortgage (a lien that is in secondary position to a first mortgage). If the borrower defaults on a loan, the lien holder in first position is the first to be repaid and any interested parties (e.g. second mortgage lender, tax collectors, mechanics’ liens) will be compensated in the order that they appear on the title or deed of the property. Because of that, lenders that hold second mortgages assume a higher risk than those that hold first lien positions.
You will almost certainly be looking for a lender that specializes in “sub-prime” or “non-prime” loans. There is no shortage of sub-prime lenders, however, with current trends showing the sub-prime sector of the mortgage industry to be increasing exponentially each year.
One of the most important aspects of obtaining a home equity loan (particularly after a bankruptcy) is the amount of equity you are seeking to draw from your home’s value. The lender is going to be primarily interested in the Combined Loan-to-Value ratio, or “CLTV” of your new loan. The higher the CLTV, the higher the risk from a lender’s point of view, and whenever the risk increases, so does the interest rate.
You should know your credit score if possible, as that will be a large factor in the percentage of equity the lender allows you to tap into. If your credit score is above 620, you have a good chance of being able to access 100% of the equity in your home, even after a bankruptcy.
By: CL Haehl -