Have Bad Credit and Want a Home Equity Loan? Here’s What to Do

Home equity loans let you turn your equity into cash, which you can use to pay for home improvements, unexpected medical expenses, or any other bills you might be facing.

Generally, lenders require at least a 620 credit score to qualify for a home equity loan. If your score isn’t quite there yet, though, you still have options.

Can I get a home equity loan with bad credit?

Lenders look at several different factors when deciding whether to approve a home equity loan or home equity line of credit (HELOC) application. Your credit history is one — the lender wants to be assured that you’ll repay the loan on time without jeopardizing your financial situation. How much equity you have in your home and your debt-to-income ratio (DTI) are also important considerations.

If you have bad credit, which generally means a score less than 580, you probably won’t qualify for a home equity loan or a HELOC. Many lenders require a minimum credit score of 620 to qualify for a home equity loan. However, to receive good terms, you should aim to have a credit score of 700 or higher. Scoring model FICO considers a good credit score to be between 670 and 739, and the higher your credit score, the better your chances of getting lower interest rates.

How to qualify for a home equity loan with bad credit

Home equity loan requirements vary by lender, but typical eligibility criteria include:

• A credit score of at least 620, but 700 or higher is better
• A loan-to-value ratio (LTV) of at least 80%, which means you have at least 20% equity in your home
• A DTI of 43% or less, which means no more than 43% of your income (including the home equity loan) would go toward debt payments

If you don’t meet the minimum credit score requirements, you’ll likely need to make it up with the other criteria. That means having more than 20% equity in your home and a DTI significantly lower than 43%.

How to get a home equity loan with bad credit

Poor credit makes it hard, but not impossible, to get a home equity loan. Work to improve your credit, and look at some alternative options in the meantime if you can’t find a lender that’ll approve you for a home equity loan.

1. Check your credit and try to improve it

To start, head to Credible's credit monitoring tool and pull your credit report. You get one free report per year from all three credit bureaus — Experian, Equifax, and TransUnion.

Once you have your credit report, check it for errors and evidence of identity theft, such as accounts you don’t recognize and credit cards that aren’t yours. Reporting these to the credit bureau can help improve your score. So take these steps:

• Pay all your bills on time: Payment history — or your track record of payments — accounts for 35% of your score, so make it a point to pay all of your bills on time, every time.
• Pay down your debts: Lenders want to see a credit utilization rate of 30% or less — meaning your balances account for 30% or less than your total available credit.
• Keep credit cards open: How long your accounts have been open impacts 15% of your credit score, so avoid closing accounts — even once you’ve paid them off.
• Avoid applying for new cards: This will result in hard credit inquiries, which can hurt your score.

Learn More: How Your Credit Score Impacts Mortgage Rates

2. Find out your DTI

Lenders will also consider your DTI when you apply for a home equity loan. This indicates how much of your monthly income goes toward paying off debt.

How to calculate DTI: Add up your monthly bills and credit card/loan payments, and divide the total by your gross monthly income. Multiply that amount by 100.

For example, if you have $2,000 in debt payments and make $6,000 per month, your DTI would be 33% ($2,000 / $6,000 x 100).

Most lenders want a DTI of 43% or lower. A low DTI can help improve your chances of getting a loan, especially if you have a lower credit score since it indicates less risk for the borrower.

3. Find out how much equity you have

How much equity you have in your home, as well as your LTV will determine whether you qualify for a home equity loan — and how much you can borrow. To find out the amount of equity in your home, you’ll need to get an appraisal, which is a professional evaluation of your home’s value. The national average cost of a home appraisal is $400, according to home remodeling site Fixr.

Once the appraisal is finished, you can calculate your loan-to-value ratio by dividing your outstanding mortgage loan balance by your home’s value.

For example: If you have $100,000 remaining on your home, and the appraisal determines it’s worth $200,000, then you have an LTV of 50% ($100,000 / $200,000). This also means you have 50% equity in the home.

Most lenders will only allow homeowners to have a combined LTV of 80% — meaning your existing loan, plus your new home equity loan can’t equal more than 80% of your home’s value.

In this example, you’d be able to borrow $160,000 (80% of $200,000) across both your initial mortgage loan and your new home equity loan. Since your existing loan still has $100,000 on it, that means you could take out a home equity loan of up to $60,000.

4. Think about bringing on a cosigner

Bringing in a family member or friend with excellent credit to cosign your bad credit loan can help your case, too. If you do go this route, make sure they understand what it means for their finances. Though you may not intend for them to make loan payments, they’re just as responsible for the loan as you.

5. Shop around for the best rates

A lower credit score will typically mean a higher interest rate, so it’s incredibly important you shop around and compare your options before moving forward. Get rate quotes from at least three to five lenders, and make sure to compare each loan estimate line by line, as fees and closing costs can vary, too.

Credible makes comparing rates easy. While Credible doesn’t offer rates for home equity loans, you can get quotes for a cash-out refinance — another strategy for tapping your home equity. Get prequalified in just three minutes.

6. Consider alternatives to bad credit home equity loans

A bad credit score can make it hard to get a home equity loan — especially one with a low interest rate. If you’re finding it difficult to qualify for an affordable one, you might consider one of these other loan options:

Cash-out refinance
Cash-out refinances replace your current mortgage loan with a new, higher-balance one. You then get the difference between the two balances in cash.

Find Out: Credit Score Needed to Refinance Your Home

Personal loans
Personal loans offer fast funding, and you don’t need collateral either. Rates can be a bit higher than on home equity loans and refinances, though, so it’s even more important to shop around. A tool like Credible can help here.

Bad credit home equity loan lenders

Traditional lenders typically won’t provide home equity loans to borrowers with bad credit. But what seems like a bad score to you may be considered a “fair” score by home equity lenders. You might still be able to qualify with a fair score if you have plenty of equity and a low DTI.

Shop around with several different home equity and HELOC lenders, and try to find ones that allow you to prequalify for a loan. Unlike a pre-approval, which requires a credit check and verification of your income, a prequalification is more of a preliminary tool that lets you self-report your credit score and financial information to give you an estimate of what loan you might qualify for.

Once you submit your information, the lender prequalifies you — or declines to prequalify you — based on the information you provided. Because there’s no credit check, there’s also no impact on your credit score.

Downsides of home equity loan with bad credit

It might be tempting to borrow against the equity in your home, but it’s not always the best option — especially if you’re struggling or have struggled in the past to keep up with your monthly debt payments.

In the event you borrow against your home equity before you’ve improved your finances, you may face certain difficulties, such as:

• Increased debt burden: Bad credit means you’ve missed payments in the not-too-distant past and haven’t had time to repair the damage. A large debt like a home equity loan could set you back even further, especially if you’re still making mortgage payments.
• Closing costs: Home equity loans often come with additional costs, such as origination fees or appraisal fees. Closing costs can total as much as 5% of the loan amount (though some lenders may pay a portion of these or waive them entirely), which makes them an expensive option even under the best circumstances. If your financial problems have made it difficult for you to save up cash, you’ll have to take out a larger loan to cover those fees. That means you’ll need even more equity and a better DTI to qualify, and your monthly payment will be higher.
• High interest: Borrowing with bad credit means you’ll pay a higher interest rate, which can also make repayment difficult.
• Foreclosure risk: A home equity loan is a secured loan that uses your home as collateral. If you default on the loan, you could lose your home to foreclosure.

Compare the best refinance rates from multiple lenders

Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.