Home Equity Loan with Bad Credit: How You Can Get It

If you need a home equity loan with bad credit but are put off by rising interest rates, stick around for a fitting solution. Since it’s secured by an asset, your home rates are often lower than what you’d find with a personal loan. We shall see how this benefits you.

Home Equity Loan with Bad Credit

Home Equity Loan with Bad Credit

Having a home equity loan with a lower credit score means you may face higher interest rates, lower lines of credit, and less favorable loan terms.

Most borrowers will find that home equity loans will still be significantly cheaper than alternative financing options, and many lenders are willing to be more flexible due to the high quality of the underlying collateral.

The Pros and Cons of a Home Equity Loan with Bad Credit


  • Fixed interest rate and consistent monthly payments
  • Easy to predict and budget for
  • Interest may be tax-deductible
  • Can be used to consolidate debt
  • More affordable than private loans and credit cards


  • Not every lender will be willing to underwrite the loan
  • Comes with a higher interest rate if your credit isn’t great
  • Adds a second monthly payment for many years
  • Uses your home as collateral, putting your property at risk

Requirements for Home Equity Loans with Bad Credit

Not all home equity lenders hold the same borrowing criteria. The general requirements contain:

1. A minimum credit score of at least 620.

2. At least 15 percent to 20 percent equity in your residence.

3. A maximum debt-to-income (DTI) ratio of 43 percent, or up to 50 percent in some circumstances.

4. An on-time mortgage payment history.

5. A Stable employment and income.

To learn the requirements for a home equity loan with a particular lender, you’ll need to do some research online or contact a loan officer directly.

If you aren’t prepared to apply for the loan just yet, ask for a no-credit-check prequalification to avoid having the loan inquiry affect your credit score.

How to Apply for a Bad Credit Home Equity Loan

Home Equity Loan with Bad Credit

Before applying for a home equity loan, decide whether you qualify.

Remember, multiple lenders allow a credit score as low as 620, and how you can overcome a lower credit score to get the best possible rate. Here are some steps to take:

1. Check Your Credit Report

While it’s possible to obtain a home equity loan with bad credit, it’s still wise to do all you can to improve your score before you apply.

A better credit score brings you a better rate. It can also assist you borrow more (up to the taxable amount).

Check your credit reports at AnnualCreditReport.com to figure out where you stand.

If there are any mistakes, like incorrect contact information, contact the credit bureau, Equifax, Experian, or TransUnion, to get it updated as soon as possible.

2. Determine Your Equity Level

To qualify for a home equity loan, lenders normally require at least 15 percent or 20 percent equity.

The amount of equity you have, your home’s appraised value, and the combined loan-to-value (CLTV) ratio help define how much you can borrow.

To calculate your home’s equity, take the value of your home and subtract the balance left on your mortgage.

While lenders will only regard the official appraised value of your home when determining how much you can borrow, you can get an idea of your home’s value through Bankrate or a real estate listing portal or brokerage.

3. Find Out Your DTI Ratio

The DTI ratio is a criterion lenders use to determine whether you can reasonably afford to take on more debt.

To estimate your DTI ratio, simply divide your monthly debt payments by your gross monthly income.

4. Consider a Co-Signer

If your credit disqualifies you for a home equity loan, a co-signer with better credit might be able to assist, in some cases.

A co-signer is just as responsible for repaying the loan as the primary borrower, even if they don’t intend to make payments.

If you drop behind on loan payments, your credit suffers along with yours.

5. Try a Lender You Already Worked with

Suppose your bank, credit union, or mortgage lender presents home equity products.

In that circumstance, it might be able to extend some flexibility, or at least help with your application, since you’re an existing customer.

6. Write a Letter to the Lender

Pen a letter of explanation describing why your credit has taken a hit.

This letter should explain credit issues, avoid catastrophizing, and include any relevant paperwork, like bankruptcy documentation.

If your credit score was affected by late payments due to job loss, for example, but you’re employed now, your lender can take this context into consideration.


Lenders that Offer Home Equity Loans with Bad Credit

Lenders that Offer Home Equity

There are home equity lenders that present loans to borrowers with lower credit scores. Here are some to consider, along with conditions:

LenderBankrate ScoreLoan typesCredit score minimumMaximum CLTVMaximum DTI
Guaranteed Rate4.6/5HELOC62090%-95%50%
Spring EQ4.3/5Home equity loan, HELOC620 for home equity loans, 680 for HELOCsUp to 97.5%43%
TD Bank4.3/5Home equity loan, HELOC660UndisclosedUndisclosed
Connexus Credit Union4.1/5Home equity loan, HELOC64090%Undisclosed
Discover 4.1/5Home equity loan62090%43%

Home Equity Loan Alternatives if You Have Bad Credit

If you require cash but have bad credit, a home equity loan is just one option. Here are some suitable alternatives:

Personal Loans

Personal loans can be simpler to qualify for than a home equity product, and they aren’t tied to your home.

This suggests that if you fail to repay the loan, the lender can’t go after your house. Personal loans have higher interest rates, but, shorter repayment terms.

This translates to a more costly monthly payment compared to what you might get with a home equity loan.

Cash-Out Refinance

In a cash-out refinance, you take out a brand-new mortgage for more than what you owe on your existing mortgage, pay off the existing loan, and take the difference in currency.

Most lenders demand that you maintain at least 20 percent equity in your home to cash out.

A caveat, however: A cash-out refi makes the most sense when you can pass for a lower rate than what you have on your current mortgage, and if you can afford the closing costs.

With bad credit, getting that lower rate might be impossible.

Reverse Mortgage

Reverse mortgages permit homeowners over the age of 62 to tap their home’s equity as a source of tax-free income.

These kinds of loans need to be repaid upon your death or when you move out or sell the home.

You can utilize reverse mortgages for anything from medical expenses to home renovations, but you must meet some requirements to qualify.

Shared Equity Agreement

Home equity investment companies may work with you even if you have a lower credit score, often lower than what traditional lenders would accept.

These firms offer shared equity agreements in which you receive a lump sum in exchange for an ownership percentage in your home and/or its appreciation.

Unlike home equity lines of credit (HELOCs) or home equity loans, you don’t make monthly repayments in a shared equity arrangement.

Some companies wait until you sell your home, then gather what they’re owed; others have multi-year agreements in which you’ll pay the balance in full at the end of a stated period.

Make sure you are in agreement with all the details of this complex arrangement.

Technically, you’re not borrowing money, you’re selling a stake in your residence to a financial professional who naturally wants to see a return on their investment.


Tips for Improving Your Credit Before Getting a Home Equity Loan

Bad Credit

To improve your chances of getting approved for a home equity loan, work on improving your credit score well before applying, at least several months.

Here are three tips to assist you improve your score:

1. At the very least, make the minimum payment, but try to pay the balance off entirely, if possible, and don’t miss that due date.

2. Don’t close credit cards after you pay them off. Either leave them open or charge just enough to have a little, recurring payment every month.

3. Be cautious with new credit since getting a higher credit limit on a card or getting a new card can lower your credit utilization ratio.

Though getting a home equity loan with bad credit can be tricky, it’s not impossible by any means.

As with any mortgage loan, it’s clever to shop around and get several quotes before deciding which lender to use on your home equity loan.

Compare the interest rate, APR, and terms, as well as personal fees and closing costs. Waiting until you have a decent amount of equity in your home can also assist.

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