Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.
How to Get A Home Equity Loan With Bad Credit
By chiara MONEY RESEARCH COLLECTIVE
Whether you’re in the market for a first or second mortgage (also known as a home equity loan), lenders will look at your credit score when determining your eligibility. But your credit isn’t the only thing the best home equity loan lenders will consider when reviewing your loan application, and you can leverage those other factors to increase your chances of approval.
If you’re looking to get a home equity loan or home equity line of credit but your credit score leaves much to be desired, read on.
What is a bad credit score?
A credit score is a three-digit number lenders use to determine your creditworthiness, which is your likelihood of paying back what you borrow. Credit scores are based on consumers’ credit history collected by different credit reporting agencies or credit bureaus. While there are others, the “big three” credit bureaus in the U.S. are Experian, TransUnion and Equifax. These companies compile your credit history in credit reports, which may vary from one company to the next.
Besides credit reporting companies, there are also different credit scoring companies, like FICO and VantageScore. When calculating credit scores, these companies use proprietary scoring models that consider factors such as consumers’ payment history and active credit accounts. FICO and VantageScore models are updated over time to include new credit data, so there are also different versions of both scores.
FICO and VantageScore credit scoring systems set a credit score range from Poor to Excellent. And whether you are deemed to have good or bad credit depends on where you fall on that scale. Here’s what those ranges look like for both companies:
| Credit score range | FICO Score ranges | VantageScore ranges |
| Exceptional or Excellent | 800–850 | 781–850 |
| Very good | 740–799 | N/A |
| Good | 670–739 | 661–780 |
| Fair | 580–669 | 601–660 |
| Poor | 300–579 | 500-600 |
| Very Poor | N/A | 300-499 |
Based on the above, a “bad” credit score falls in the 300–579 range in the FICO system and between 300–600 in the VantageScore system.
How to get a home equity loan with bad credit
According to Experian, FICO is the most popular credit score model in the mortgage lending industry. Qualifying for a conventional mortgage can be difficult if you have a poor FICO credit score (under 580). In such cases, borrowers may find government-backed FHA, USDA and VA loans or reverse mortgages more flexible in their credit and income requirements. If you’re trying to get a home equity loan with a lower credit score, your options could be more limited.
Home equity loans — often called second mortgages — allow homeowners with tappable home equity to pull money out of their existing mortgage and use it for home improvements, debt consolidation, student loan repayment or other purposes — even to buy another house. Lenders will look at other factors besides your credit score when determining your eligibility for this type of loan. If you can satisfy the other borrowing criteria, you can increase your chances of approval.
Home equity loan requirements
Lenders that offer home equity loans will likely require the following.
- Credit score: Lenders generally require a credit score of 620 (in the fair range) or higher. If your score falls below that range, your ability to meet the lender’s other borrowing requirements could help tip the balance in your favor. Remember that the interest rate and the loan amount you may qualify for will partially depend on your credit score.
- Home equity: You may be able to borrow up to 80% of the equity in your home through a home equity loan or line of credit. To do that, you must first have sufficient tappable home equity. Most lenders require at least 20% equity to qualify for a home equity product. Since equity is the value of your home minus what you still owe on it, the loan process will entail a home appraisal.
- Combined loan-to-value (CLTV) ratio: To determine how much you could borrow through a home equity loan, lenders will look at your CLTV ratio or the total amount of loans secured by your home (the primary mortgage, second mortgages, etc.) divided by the appraised value of your home. A CLTV ratio under 80% is generally considered good.
- Debt-to-income (DTI) ratio: Your income and how much is tied up in debt payments is particularly important to lenders. Knowing how much you can afford to put toward your loan each month gives lenders a good idea of your ability to repay — or your likelihood of defaulting. To calculate your DTI ratio, divide your monthly debt obligations by your gross monthly income. Most banks and financial institutions that offer home equity products require a DTI ratio of 43% or less, but some lenders may accept up to 45%.
You may also have to provide proof of employment, income and other assets through past tax returns, pay stubs and bank statements. But, as with all loans, qualification requirements vary by lender. If you’re a freelancer or someone with variable income, know that some mortgage lenders are willing to consider alternative credit data.
Considerations before you seek a home equity loan with bad credit
If you decide to go through with a home equity loan application despite your credit issues, there are some things to keep in mind.
1. You might not get the most favorable terms
While you can get approved for a home equity loan with less-than-perfect credit, you probably won’t qualify for the lowest interest rate and the most favorable loan terms. The maximum amount you can borrow will depend on a combination of the factors mentioned in the previous section. With this in mind, working on your credit score could help you snag a lower interest rate and pay less for borrowing.
According to the Consumer Financial Protection Bureau, consumers trying to rebuild their credit should:
- Pay down their debt, starting with higher-interest debt
- Pay their bills on time (setting up automated payments could help)
- Stay below their credit limit and avoid maxing out credit cards
- Keep their credit card applications to a minimum
- Try getting a secured credit card instead of a regular one
- Pay their credit card balance in full each month
- Check their credit reports and correct any mistakes
This last point could be especially helpful if you haven’t read through your credit reports in a while. Any incorrect negative items on your reports could dent your score. You can request all three of your credit reports for free once a year at AnnualCreditReport.com.
While your credit reports won’t contain your credit scores, they can help you get a clearer picture of your credit situation and how to improve it. Consider a service like Credit Karma, which offers free scores based on the VantageScore 3.0 scoring model to get your credit score. Alternatively, several credit card issuers allow customers to access their FICO scores for free.
Applying with a cosigner could improve your approval odds if you need access to a home equity loan immediately and don’t have time to work on your credit.
2. You can lose your home if you can’t pay your loan
Home equity loans and HELOCs are secured by your home. If you fail to repay your loan, you could end up with an underwater mortgage (owing more on your house than what it’s worth) or even losing your home to foreclosure.
If what led you to your current credit situation is related to missed payments, addressing your money habits could help you avoid repeating history. Even if you plan to use a home equity product to consolidate high-interest debt (such as credit card debt), consider credit counseling to complement your credit repair plan.
3. There are key differences between home equity loan options
Home equity loans provide borrowers with a lump sum of money soon after closing. As they feature fixed interest rates, they’re generally recommended for borrowers looking to fund a one-time expense who want the predictability of fixed monthly payments. Not all lenders offer home equity loans and those that do often advertise their products along with home equity lines of credit (HELOCs), which work differently.
HELOCs are often compared to credit cards because they allow borrowers to draw money as needed during a specified draw period and pay it back later (called the repayment period). HELOCs typically have variable rates that can change depending on the prime rate, so your monthly payment could change from month to month. Some HELOC lenders allow borrowers to lock in a fixed rate for all or a portion of their line amount — for a fee.
The right home equity product for your needs will depend on how you plan to use your home equity and whether you’re comfortable with a fixed or variable interest rate. Again, keep in mind that your home will secure your home equity loan or HELOC, so make sure you opt for a product you can comfortably afford. Using a home equity calculator could help you make a better-informed decision.
Read our guide on HELOCs vs. home equity loans for more information. And for ideas on how to get the most out of your home equity loan, check out our article on the best ways to use home equity this year.
4. You’ll still have to pay closing costs and other fees
According to Experian, closing costs on home equity loans and HELOCs typically range between 2% and 5% of the loan amount. These charges could include origination, title search and appraisal fees, among others. Some lenders don’t levy closing costs on home equity products, but that may be contingent upon the loan or line of credit amount. Lastly, HELOCs may also be subject to annual fees, inactivity fees and charges for converting your line of credit from a variable to a fixed rate.
Can I get a HELOC with bad credit?
You may be able to get a HELOC with bad credit. Some lenders could give more weight to factors other than credit score in their loan approval process. And since it’s up to every lender to set their own standards regarding loan requirements, having a low credit score does not necessarily mean you will not qualify for a home equity line of credit. However, it’s important to remember that a low credit score could mean higher rates.
How to apply for a home equity loan with bad credit
Check your credit report
Check your credit reports before applying for a home equity loan or any other loan. This will help you better understand your position as a loan applicant and what to expect. It’s also a good measure to help you detect any inaccuracies and correct them before applying for a loan. You can get free credit reports from all three big credit reporting agencies at least once a year.
Calculate your DTI ratio
Another factor lenders consider when they review your loan application is your DTI ratio. Otherwise known as your debt-to-income ratio, it is calculated by dividing your monthly debt payments by your gross monthly income. This information helps lenders know if you are able to take on mortgage payments.
Use a home equity loan payment calculator
This tool is a feature on many lenders’ websites. Its purpose is to help you calculate how much your monthly payments could be with your new mortgage rate and repayment terms. An estimate of your potential monthly payment amount will help you determine if a home equity loan is a plausible option.
Have a good amount of equity accrued
If you have bad credit, having a substantial amount of equity in your home could increase your chances of getting approved for a home equity loan. Though most lenders typically ask that you have at least 20% equity, having more could help offset bad credit for a lender.
Find a co-signer
Another way to improve the likelihood of approval is to have a co-signer. By combining your incomes, you could lower your DTI ratio. Also, if your co-signer has a good credit history and relatively low existing debt, it could help you seem like less of a default risk to your lender.
Apply with a lender you have history with
Lenders are more likely to approve you for a loan or offer you more favorable rates and terms if they already know you. Some financial institutions offer perks to their members like discounts on interest rates or special mortgage pricing as a way to increase customer loyalty. If you have a relationship with a lender or financial institution, it could be worth it to check your chances of approval with them first.
Pros and cons of obtaining a home equity loan with bad credit
- Interest rates may be lower than other loans
- You repay in fixed monthly installments
- Refinancing a home equity loan is possible
- Loan terms may be stricter
- The maximum loan amount could be lower
Home equity loan alternatives
Home equity lines of credit (HELOCs)
HELOCs are a good alternative to home equity loans because they are also secured by the equity you have in your home, which some lenders might value more than your credit score. If you are interested in a HELOC, you have to be certain that you can keep up with your mortgage payments.
Cash-out refinance
This is another way in which you can borrow against your home equity. A cash-out refinance will allow you to replace your current mortgage. The lender pays off your remaining mortgage balance and rolls it into a new mortgage. This new mortgage comes with new terms and rates. This is a good alternative if you only wish to have one mortgage payment instead of two, as with home equity loans.
Personal loans
If putting down your home as collateral for a loan feels too risky, a personal loan could be a better option for you. Note, however, that interest rates for personal loans are higher than those for home equity loans or HELOCs because lenders don’t have the security of foreclosing on your home if you default on payments.
How To Get A Home Equity Loan With Bad Credit FAQs
Are there guaranteed home equity loans for bad credit?
As with all types of loans, the qualification requirements for home equity products vary by lender and loan amount, among other factors. Several of the best home equity loan lenders offer loans to applicants with credit scores in the 620 range.
If you have bad credit, meaning a credit score of less than 579, you may still qualify for a home equity loan or line of credit if you can satisfy other lender requirements. However, there is no guarantee you will be approved.
What is the lowest credit score for a home equity loan?
What could disqualify you from getting a home equity loan?
How do companies restore bad credit?
Credit repair companies review your credit reports and dispute incorrect negative items on your behalf directly with the credit bureaus. According to the Consumer Financial Protection Bureau, these companies charge a fee for their services, which can often be high. If you're thinking about hiring the services of a credit repair company, understand that you cannot remove negative items that are correct from your credit report. Also, it may take time for your credit score to reflect any positive changes. Additionally, you can work on improving your credit score yourself without the need to hire a credit repair service.
The CFPB recommends being on the lookout for credit repair companies that don't have customers' best interests in mind. Things to watch out for include: companies that demand payment upfront; companies that offer guaranteed results and promises of increasing your credit score to a certain number or fixing your credit in a short period; companies that don't disclose the total cost of their services, don't provide you a service contract and don't inform you of your rights, including the right to cancel your contract within three business days; and companies that suggest you create a new credit identity by applying for an employer ID number instead of a Social Security number.
What are the best alternatives if you have bad credit?
Your options will depend on your specific situation, but addressing the root of your credit issues can be a good way to break the debt trap cycle and start rebuilding your credit. That can entail revisiting your spending habits, paying down high-interest debt (and avoiding new debt) and establishing an emergency fund.
Credit counseling could also be an option if you're looking for guidance on improving your credit and financial situation. Many credit counseling agencies offer some free services, but most charge a fee for creating a debt management plan (DMP).
Summary of our guide on how to get a home equity loan with bad credit
If you have bad credit, home equity loans are not out of your reach, but you will need to meet other lender eligibility requirements. If possible, work on paying down your debt and invest in home improvement projects that can help you build equity in your home and increase the market value of your property. You could also apply with a cosigner with excellent credit to increase your chances of approval.
Remember that applying for any home loan with poor credit could mean qualifying for a higher interest rate and a smaller loan amount. Additionally, failure to keep up with loan payments could mean losing your home to foreclosure, so make sure you opt for a home equity product you can afford.
