Key takeaways
- You typically need better credit to qualify for a home equity loan than a mortgage, but some lenders will still approve you with a score as low as 620.
- If your credit score isn’t ideal, you may still qualify for a home equity loan, but you’ll likely pay a higher interest rate.
- Strategies for potentially obtaining a loan despite lower credit include applying with a co-borrower, applying with your current financial institution and writing a letter of explanation to the lender.
Can you get a home equity loan with bad credit?
Yes, you can. Having a lower credit score doesn’t necessarily mean a lender will deny you a home equity loan. Some home equity lenders allow for FICO scores in the “fair” range (the lower 600s) as long as you meet other requirements around debt, equity and income.
What are “good” and “bad” credit scores for home equity loans?
Most home equity lenders require a score in the “fair” range or higher. For many, this means 640 or 660, although some lenders accept scores as low as 620. While a score in the 500s might buy you a house through an FHA mortgage, it’s unlikely to get you approved for a home equity loan.
And of course — as with any loan — the lower your credit score, the less likely you will qualify for the best interest rates. To secure the best interest rates, you generally need a score of 700 or higher.
Keep in mind that score requirements can vary within the same institution depending on how much you want to borrow and your overall equity.
For reference, here’s how FICO — the most popular credit scoring model — categorizes different credit scores:
Why home equity loans have more stringent requirements
Home equity loans require higher credit scores, for one, because you typically already carry the debt for your primary mortgage. Lenders want to ensure you can manage a home equity loan on top of that. In addition, home equity loans are generally “second liens.” If you default and face foreclosure, your primary mortgage lender is paid first. Because home equity lenders only get paid if money is left over, they want to be very sure you won’t default.
How to apply for a bad-credit home equity loan
Applying for a home equity loan is similar to the standard mortgage process, but when you have a lower credit score, you must actively prove you’re a safe bet for the lender. The following steps can help you build your case and secure approval:
1. Audit your financials
Before approaching a lender, calculate the three numbers that dictate your eligibility. If your credit is weak, the other two metrics must be rock-solid to offset the lender’s risk:
- Your credit profile: Check your credit reports at AnnualCreditReport.com. If there are any errors, notify the bureau and ask for a fix. Lenders typically pull from Equifax, Experian, and TransUnion and then rely on your middle score.
- Your usable equity: Most lenders determine your eligibility for a home equity loan and how much you can borrow using your combined loan-to-value (CLTV) ratio, or the amount of debt secured by your home compared to its value. You must typically keep 20% of your home value untouched. On a home valued at $420,000, that means preserving $84,000 in equity. If your current mortgage balance is $250,000, you may qualify to borrow as much as $86,000 ($170,000 minus the $84,000 buffer).
- Your debt-to-income (DTI) ratio: Find this number by dividing your total monthly debt payments by your gross monthly income. While some conventional lenders accept DTIs of up to 43 percent, you’ll want this number as low as possible to counter a poor credit score.
Home equity loan calculator
Bankrate’s home equity loan calculator can estimate your potential home equity loan amount.
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2. Consider a co-borrower
Adding a co-borrower with strong credit and steady income can save an application that would otherwise be rejected. This person shares full legal responsibility for the loan, which reduces the lender’s default risk. However, this strategy is not a magic fix.
“A co-signer can help with credit and income issues for an applicant who has a lower credit score, but ultimately, the main applicant or primary borrower will have to have at least the bare minimum credit score that is required based on the bank’s underwriting guidelines,” says Ralph DiBugnara, president of Home Qualified, a real estate platform for buyers, sellers and investors.
3. Try a lender you already work with
If your current bank, credit union or mortgage lender offers home equity products, it might be willing to extend some flexibility since you’re an existing customer.
“A loan officer familiar with the details of an applicant’s situation can help them present it to an underwriter in the best possible way,” DiBugnara says.
4. Write a letter to the lender
You don’t have to let a past financial crisis speak for itself on your credit report. Write a concise, factual letter of explanation detailing why your score dropped and, crucially, how your situation has stabilized. This letter should include any relevant paperwork, like bankruptcy documentation. If your credit score was impacted by late payments due to job loss, for example, but you’re employed now, your lender can take this context into consideration.
How to get a HELOC with bad credit
Applying for a home equity line of credit (HELOC) is pretty much the same as applying for a home equity loan, but if you have bad credit, a loan might have a slight edge over the line of credit. That’s because home equity loans have fixed interest rates and fixed payments, so you’ll know exactly what you need to repay each month. This predictability could help you better manage your budget and keep up with payments.
HELOCs, on the other hand, often have variable rates, which can cause unexpected increases in your monthly payments. For this reason, lenders often have higher credit-score criteria for HELOCs than home equity loans.
Lenders that offer home equity loans to those with bad credit
There are home equity lenders that cater to borrowers with lower credit scores. For example, you might be able to get a loan from a non-qualified lender, or a non-QM lender, although you’ll pay more. A broker can help you find one of these lenders. Some mainstream lenders also have lower credit score requirements than others. They include:
| Lender | Bankrate Score (scale of 1-5) | Loan types | Credit score minimum | Maximum CLTV |
|---|---|---|---|---|
| Connexus Credit Union | 4.2 | Home equity loans, HELOCs | 640 | 90% |
| First Access Lending | 4.4 | Home equity loans, HELOCs | 620 for home equity loans, 660 HELOCs | 85%-90% |
| Renofi | 4.6 | Home equity loans, HELOCs | 620 | 95% of post-renovation value |
| Spring EQ | 4.6 | Home equity loans, HELOCs | 640 | 90% |
| TD Bank | 3.7 | Home equity loans, HELOCs | 620 | 90% |
What to do if your home equity loan application is denied
If your application for a home equity loan is rejected, first, ask the lender for specific reasons why. The answer can help you address any issues before applying in the future.
If your credit was one of the deciding factors, you can improve your score using these strategies:
- Pay bills on time every month. At the very least, make the minimum payment, but try to pay the balance off completely, if possible — and don’t miss that due date.
- Don’t close credit cards after you pay them off. Either leave them open or charge just enough to have a small, recurring payment every month. Closing a card reduces your credit utilization ratio, which can decrease your score. Aim to use less than 30 percent of your available credit.
- Be cautious with new credit. Getting a higher credit limit on a card or getting a new card can lower your credit utilization ratio — but not if you immediately max things out. Treat the newly available funds as sacred savings.
If you don’t have enough equity in your home, wait until you’ve built a bigger stake — mainly by making your monthly mortgage payments — before submitting a new application.
Both approaches may take six months to a year to make a significant difference in your credit profile. If you’re in a hurry, consider applying to other lenders, which may have different criteria. Just bear in mind that more lenient terms often mean higher interest rates or fees.
Home equity loan alternatives if you have bad credit
If you need cash but have bad credit, a home equity loan is just one option. Here are some alternatives:
Personal loans
Personal loans can be easier to qualify for than home equity products, and they aren’t tied to your home. That means it’s not at risk if you default. However, personal loans have higher interest rates than home equity products — up to 36 percent — and shorter repayment terms. This translates to a more expensive 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 cash. Most lenders require you to maintain at least 20 percent equity in your home in order to cash out.
A caveat, however: A cash-out refi makes the most sense when you can qualify for a lower rate than you’re currently paying, and if you can afford the closing costs. Unless rates have dropped dramatically since you originally borrowed, getting that lower rate might not be possible, especially with bad credit.
Frequently asked questions
Additional reporting by Mia Taylor and Shannon Martin
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