How To Get a Home Equity Loan With Bad Credit

A home equity loan may be a viable option when you need funds but don’t want to pay high interest rates. Compared to a personal loan, a home equity loan has lower interest rates because it’s secured by an asset. However, you may find it challenging to qualify if you have a credit score under 620.

When seeking a bad credit home equity loan, it’s important to understand the financial requirements of different lenders, use strategies to boost your application, and evaluate alternatives to determine which type of loan may be the best fit for you.

Can You Get a Home Equity Loan With Bad Credit? 

Most lenders require a credit score of at least 620. So, can you get a home equity loan with bad credit? Yes, but you’ll need to have strong financials. You’ll typically need to have low debt, more equity in your home, and higher income to qualify with bad credit.

Home equity loans for bad credit will also come with higher loan rates. Consider applying with a co-signer to see if it’ll help you secure competitive rates, or consider alternatives like a home equity line of credit (HELOC).

How Your Credit Score Affects the Chance of Getting Approved

Getting a home equity loan is harder than getting a mortgage to buy a house with bad credit. A home equity loan is a second mortgage, so it’s riskier for a lender. This is one of the reasons why lenders have stricter eligibility requirements.

Getting a home equity loan with bad credit is often challenging since lenders are wary of taking the risk. If your credit score is lower than 620, you may be able to qualify if you have a low loan-to-value (LTV) ratio and a low debt-to-income ratio overall.   

"Remember, when you’re applying for a home equity loan, if your equity is less than 20%, your lender will require you to pay Private Mortgage Insurance (PMI), which is an added monthly expense,” says Brad Reichert, financial expert and founder and managing director of Reichert Asset Management LLC. 

“You’ll have to make these payments each month until you pay down your loan and/or your home appreciates enough so that you have more than 20% equity in it again,” explains Reichert.  “The average PMI premium will cost between 0.46% and 1.50% of your loan amount per year, depending on your credit score. The lower your credit score, the higher your PMI premium will be,” he adds.

If your financial situation and credit score aren’t up to the mark, you may want to explore alternatives or take time to rebuild your credit before you apply for a loan.

How Home Equity Loans Can Help People With Bad Credit 

If you have poor credit due to maxed-out credit cards and other high-interest debts, you can use a home equity loan with bad credit for debt consolidation to make repayments easier.

The current average home equity loan interest rate is 8.97%. If you have credit cards and personal loans at higher interest rates, you can save a considerable amount of money in interest charges by consolidating them with a home equity loan.

Making regular payments on the loan can also help you improve your credit score over time. The payments you make on the loan will be reported to the credit bureaus (Experian, Equifax, and TransUnion). Keep in mind that a home equity loan is a secured loan for bad credit, so if you fail to make payments, you risk losing your home through foreclosure.

Where To Get a Home Equity Loan With Bad Credit

While there’s no guaranteed home equity loan with bad credit, some lenders may work with borrowers with poor credit. However, these loans may be stricter on equity and income requirements and may have higher interest rates.

Here are some of the top lenders you may want to consider for bad credit home equity loans.

Requirements for Home Equity Loans With Bad Credit

Home equity lenders usually have stricter minimum credit score requirements compared to home loans to limit their risk. However, this doesn’t mean you won’t be able to qualify with a lower credit score. Your approval will depend on the lender’s other qualification requirements, such as:

• A low debt-to-income ratio of under 43%.
• At least 15% equity in the property. Bad credit borrowers may need to have at least 20% equity.
• A credit score of at least 620.
• Stable monthly income and employment history.

How To Apply for a Bad Credit Home Equity Loan

If you’re wondering how to get a home equity loan with bad credit, we have a step-by-step guide below:

1. Get a copy of your credit report and check your credit score. Dispute any errors you find on your credit report to improve your credit score.
2. Calculate your debt-to-income ratio, which is your monthly income compared to your monthly debt payments. Ideally, this should be less than 43%.
3. Check how much equity you have in the property. Lenders are usually willing to lend up to 80% of the equity.
4. Consider applying with a co-signer to boost your chances of qualifying.
5. Try working with a lender you already have a relationship with, for example, your current mortgage lender or the primary bank where you have your accounts.
6. Apply with at least three lenders to shop around and get the best rates and loan terms.
7. Write a letter to the lender explaining your circumstances and include any relevant paperwork to support your application.
8. Once you finalize a lender, provide the necessary documents and close the loan.

How To Improve Your Chances of Getting a Home Equity Loan

If you’re hoping to get a home equity loan with bad credit, there are a few things you can do to improve your chances of getting approved:

• Make sure all information on your credit reports is accurate. Dispute any errors to improve your credit score.
• If your credit score is lower than 620, try to raise it by paying down debts and establishing a positive payment history.
• Reduce your debt-to-income ratio by paying down some debts.
• Review your credit card balances and bring them down to 30% of your available credit.
• Try to build more equity in the home by paying down the balance more quickly and getting a recent appraisal.
• Apply with a co-signer with a good credit history and income to strengthen your loan application.

Alternatives to Home Equity Loans for Individuals with Bad Credit

If you’re unable to qualify for a home equity loan with bad credit, there are other options to consider.

Personal Loans

It’s easier to qualify for a personal loan for bad credit compared to a home equity loan. However, they have higher interest rates and shorter repayment terms. This means your monthly payments can be higher. The loan funds can be used for home improvements, medical expenses, or any other purpose.

Cash-Out Refinance

A cash-out refinance involves taking out a new mortgage for more than your current mortgage balance. You can pay off your first mortgage and use the difference for any purpose you want. However, the amount of equity needed to qualify is at least 20%. Pre-qualify and compare the interest rates of multiple lenders when refinancing.

Reverse Mortgage

Homeowners over the age of 62 can tap into their home’s equity for a tax-free income through a reverse mortgage. You can use the loan funds for any purpose, such as home renovations and medical bills. The loan will need to be repaid when you sell or move or upon your death.  This solution is not for everybody, and it comes with several important conditions, so make sure to get all the details before you apply and sign on the dotted line.

Home Equity Line of Credit (HELOC)

A HELOC for bad credit works like a revolving line of credit but is secured by your home’s equity. You can borrow from this credit line during the draw period. Once the draw period ends, you won’t be able to use the credit line. You must then repay the balance in monthly loan payments.

Improve Your Credit To Qualify for a Home Equity Loan

While it isn’t easy to get a bad credit home equity loan, it’s possible to improve your chances by applying with a co-signer and bringing down your debt-to-income ratio. You can also improve your chances of qualifying by improving your credit.

An easy way to improve your FICO score is by paying your bills on time each month. Pay down your credit card balances, but don’t close accounts after you pay them off. Be careful not to use more than 30% of your total available credit limits to keep your credit utilization low.

You may also want to consider alternatives like getting a personal loan or HELOC with bad credit.