A job loss, an illness or a separation can leave a mark on your credit report that lasts longer than the crisis itself. (If you’re separating and want to keep the home, see buying out a partner after separation.) If you have equity in your home, that equity can carry weight with lenders even while your credit recovers.
How equity lenders view credit problems
Equity lenders still pull your credit, but they’re more interested in the story than the score alone:
- What happened, and is it behind you?
- How recent are the problems?
- Are your payments current now, especially on your mortgage?
- How much equity protects the loan?
A clear explanation and a few months of on-time payments can make a real difference.
What may need to be paid off
Lenders often require some debts to be cleared at closing, such as collections, judgments, or tax arrears registered against the home. Paying these from the new mortgage can also help your credit recover.
What it costs
Expect a higher rate and possibly a lender fee, especially if problems are very recent. The more equity you keep, the better the terms tend to be. See what equity mortgages cost.
Rebuild while you have the mortgage
- Pay every account on time, every month.
- Keep credit card balances low compared with their limits.
- Check your credit reports from both Equifax and TransUnion, and dispute errors.
- Avoid new debt during the term.
- Review progress with a broker before renewal.
The goal is to move to a lower-cost lender when your term ends. See moving from an equity lender back to a bank.
When to wait instead
If problems are ongoing, for example you’re still missing payments, borrowing more against your home can make things worse. Stabilize first. See the risks of borrowing against your home.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.