Getting A Home Equity Loan With Bad Credit

12 Min Read
Updated Feb. 23, 2024
Written By
Ashley Kilroy
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Getting financial support when you’re in a tough spot can be even more stressful if you’re trying to rebuild your credit. You’re not alone, as homeowners across the country face unexpected expenses, home repairs, and debt consolidation.

Fortunately, you may be able to qualify for a home equity loan with bad credit to meet your financial needs. Plus, alternative options are available for borrowers in these situations. Understanding them is critical before deciding on a loan type. While a suboptimal credit history can hurt your ability to tap your equity, combining the right strategies with a thorough application can help get you approved.

Qualifying For A Home Equity Loan With Bad Credit

An ideal credit score for buying a house with a conventional loan is 620 and above, with higher scores helping borrowers obtain better terms and rates. Scores below this threshold can hinder you when applying for a mortgage. Here’s a breakdown of credit score ranges and how they can impact your ability to qualify for a home equity loan:

  1. Excellent (740-850): Borrowers with credit scores in this range present minimal risk to lenders. They are likely to qualify for the best interest rates and terms available because of their financial track record.
  2. Good (670-739): This range is still considered favorable, and borrowers will likely qualify for competitive interest rates. While not as advantageous as an excellent score, good credit demonstrates a responsible financial history.
  3. Fair (580-669): Credit scores in this range are considered average, and borrowers may still be able to qualify for a home loan, but they might face higher interest rates and less favorable terms. Some government-backed loan programs, like FHA loans, accept borrowers with scores in this range.

Home equity loans increase in amount with better credit scores. A 680 credit score grants access to 80% of your equity. If your score is 700 or better, you can access 85%. A score of 740 lets you access 90%.

Remember, credit is among the numerous factors lenders consider when reviewing your loan application. These criteria also apply to home equity loans. Here are the financial characteristics influencing eligibility for a home equity loan:

See What You Qualify For

How To Apply For A Home Equity Loan With Bad Credit

Although getting a home equity loan with bad credit can be challenging, borrowers can use the following strategies to give themselves the best shot at qualifying:

  1. Review Your Credit Report

Reviewing your credit report before applying for a home equity loan allows you to see how to improve your financial position. Addressing mistakes, credit card balances, and lingering debts on your report can boost your score, giving you a better chance to qualify. In addition, you can set a goal for your credit score and spend several months making on-time payments on your bills.

Therefore, examining your credit report in advance allows you to address any issues proactively, reducing the likelihood of surprises later. This way, you can take the necessary action to reach the 680 score threshold and qualify for a home equity loan.

  1. Determine Your DTI

Your DTI measures how much of your income goes toward monthly debt obligations. Lenders like when borrowers have ample room in their budgets for a monthly loan payment. In other words, a lower DTI signifies that you can take on another loan payment, reducing risk for lenders. As a result, reducing your DTI can improve your chances of getting a home equity loan.  

You can calculate your DTI by dividing your monthly debt payments by your monthly income. For example, say you have the following monthly debt payments:

  • Mortgage/rent: $1,500
  • Car loan: $300
  • Student loan: $200
  • Credit card minimum payments: $100

So, your monthly debt payments amount to $2,100. 

Next, say your monthly income is a $4,500 salary. Therefore, $2,100/$4,500=.46. Your DTI is 46%, meaning it’s best to decrease your monthly debts or increase your income to push your DTI beneath the 45% threshold if possible.   

  1. Calculate The Equity

Knowing how much equity you have in your home is crucial when applying for a home equity loan because it affects the loan terms and size. Here’s why:

  • Determines borrowing capacity: Equity is how much of the home you own, calculated as the current market value of your home minus the mortgage. The more equity you have, the more you can borrow.
  • Influences loan approval: Lenders use the loan-to-value ratio (LTV) to assess risk. This ratio compares the amount of the loan requested to the value of the home. The higher the LTV, the riskier the loan is for the lender. LTV is another way to express how much equity you have. Knowing your equity allows you to gauge the likelihood of loan approval.
  • Affects interest rates and terms: Lenders typically offer better interest rates and terms to borrowers with higher levels of equity. If you have a substantial amount of equity, you can secure a more favorable interest rate, saving you money over the life of the loan.


You can calculate your LTV by dividing your outstanding home loan amount(s) by your home’s current market value. For example, say you have a home that appraises for $300,000. You have $100,000 left on your mortgage, meaning your current LTV is 33%. You’re seeking a $50,000 home equity loan. Receiving that loan will bring your LTV to $100,000+$50,000=$150,000. As a result, the home equity loan will increase your LTV from 33% to 50%. Remember, lenders won’t approve a home equity loan that pushes your LTV past 90%.

  1. Find A Co-Signer

Borrowers with low credit scores can also use a co-signer to help secure a loan. If a family member or friend has a good credit history and financial stability, it’s worth asking them to be your co-signer. If they agree, they’ll take responsibility for the loan if you, the primary borrower, fail to make payments. As a result, the co-signer’s creditworthiness reduces risk for the lender, increasing your likelihood of loan approval. In addition, the lender will factor in the co-signer’s income and debt payments to the overall DTI calculation.

It’s crucial to have a transparent, honest conversation with the co-signer about the responsibilities and potential risks. This way, both parties understand the implications of co-signing. Remember, the co-signer’s credit score and financial stability are at stake. If the borrower defaults on the loan, it can negatively impact the co-signer’s credit, and they will be financially liable for repaying the loan.

Ways To Improve Your Chances Of Getting A Home Equity Loan

Here are the top strategies for strengthening a credit score and getting a home equity loan:

Check Your Credit Reports For Errors

Reviewing your credit reports is crucial because inaccuracies or errors can damage your credit score. To start, check your reports with the three major credit bureaus: Experian®, Equifax™, and TransUnion®. Each of these institutions generates a summary of your credit history. Scrutinize each report for mistakes. For example, an account belonging to someone with a similar name could appear on your report. In addition, a fraudulent purchase or a debt listed multiple times can hurt your credit.  

If you identify errors, report them to whichever bureaus put out the report containing them. The bureau will investigate your claim and remove the item if they deem it erroneous.

Avoid Activities That Can Lower Your Score 

Certain financial behaviors, such as missing payments, maxing out credit cards, or applying for multiple new lines of credit, can lower your credit score. In addition, taking on debt for a sizable purchase, such as a car, usually dings your credit for several months afterward. This type of financial activity can lower your chances of approval when applying for a home equity loan.

Lower Your DTI

Reducing your monthly debt payments or increasing your income can lower your DTI, making you a stronger candidate for a home equity loan. Here are some strategies to help lower your DTI:

  1. Pay down existing debt. Focus on paying off high-interest debts like credit cards or personal loans. Doing so reduces your monthly debt payments, lowering your DTI.
  2. Avoid taking on new debt. Applying for new credit cards or loans usually increases monthly debt obligations, raising your DTI.
  3. Increase your income. Look for opportunities to boost your income, such as taking on a part-time job, freelancing, or exploring side gigs. Likewise, you could rent out a spare room in your house or a vehicle you don’t often drive. Any additional monthly income will improve your DTI.
  4. Budget wisely. Create a budget that directs a larger portion of your income toward debt repayment. This way, you’ll pay off existing debts more quickly. After several months of disciplined budgeting, you can establish a better DTI, increasing your chances of approval for a home equity loan. 
  5. Consider consolidation. Rolling several monthly debt payments into a single balance with a lower interest rate can reduce your monthly obligation. 
  6. Refinance existing loans. Refinancing high-interest loans, such as student loans or personal loans, may result in lower monthly payments, thus reducing your DTI.


Shop Around For Lenders

Loan products vary between companies. As a result, shopping for a lender is advisable when you’re seeking a home equity loan. It’s a good idea to contact at least three lenders for offers and compare the details. First, compare the annual percentage rate (APR) for each loan. This factor indicates how expensive the loan will be while you pay it. Likewise, any additional fees, such as an origination fee, increase the loan’s cost.

In addition, it’s best to find the loan term that fits your situation. Specifically, shorter terms result in paying less interest over the life of the loan, while longer terms provide more time and lower monthly payments.  

Lastly, you can research consumer reviews online. While one or two borrowers criticizing a lender might not be noteworthy, hundreds of reviews with the same consensus will give you an accurate picture of how the lender does business. As you look through reviews, keep an eye out for comments from borrowers with low credit scores evaluating the lender. Plus, a lender’s customer service, communication style, and website interface can affect your experience as a borrower.

Get a Home Equity Loan online.

Let’s match you up with lenders who can help with your unique financial situation.

Alternatives To A Home Equity Loan 

A home equity loan can be challenging to obtain for borrowers with suboptimal credit. Fortunately, you can explore the other options available:

Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) allows homeowners to tap into their home’s equity, but they operate differently than home equity loans. A HELOC is a revolving line of credit based on the equity in your home. You can draw from this line of credit and pay interest on the borrowed amount. As you repay the principal, you can borrow against the line of credit again.

A HELOC with bad credit is advantageous because HELOCs typically have lower interest rates than credit cards, the most popular type of revolving credit. In addition, you can borrow what you need when you need it, unlike a home equity loan that gives you a lump sum. This feature is helpful for ongoing expenses like home improvements or education costs.

Borrowers can also deduct the interest paid on a HELOC if they use the funds for home improvements. Lastly, making on-time payments on your HELOC will improve your credit score over time.

HELOCs also come with certain drawbacks. For example, they can have variable interest rates, creating unpredictable monthly payments. Furthermore, the flexibility of a HELOC can lead to overspending because you can use it like a credit card. This characteristic can lead to inexperienced borrowers accumulating more debt than they can comfortably repay.

Similarly, suppose you only make interest payments during the draw period. In that case, you may face higher monthly payments when you enter the repayment period, which can be a shock to your budget.

Personal Loans

You can get a personal loan instead of a home equity loan. Personal loans are more obtainable because they don’t require collateral or equity in your home. However, these loans have higher interest rates unless you secure them with collateral and typically have shorter terms. As a result, a personal loan can result in a higher monthly payment and more interest expenses for the tradeoff of wider accessibility. In addition, a home equity loan can help you obtain a larger loan if you have ample equity.

Cash-Out Refinance

A cash-out refinance means replacing your first mortgage for one with a larger loan amount based on the equity in your home. Doing so lets you tap your equity, get a better interest rate, and extend your loan term. Plus, it doesn’t create a second loan, which is a downside of the home equity loan.

Reverse Mortgage

Reverse mortgages allow senior homeowners to convert equity into monthly cash installments. To be eligible for a reverse mortgage, homeowners must be at least 62 years old. The amount you can borrow depends on factors such as your age, the appraised value of the home, and current interest rates.

Reverse mortgages usually allow the homeowner to roll loan costs into the loan and don’t have credit score requirements. However, the borrower will leave their heirs with a home they must purchase or refinance, sell or walk away from to resolve the debt with the lender.

Get a Home Equity Loan online.

Let’s match you up with lenders who can help with your unique financial situation.

How To Get A Home Equity Loan With Bad Credit FAQs

Now that you have the home equity loan basics under your belt, here are some frequently asked questions and their answers about how to get one with bad credit:

If I have bad credit, is a home equity loan or a HELOC better?

Borrowers with bad credit should explore alternative options. Those with bad credit may not be in a position to take on more debt. However, if your financial situation allows, talk with lenders for both home equity loans and HELOCs and evaluate the offers you receive. Typically, the loan product with a lower interest rate and longer term will benefit borrowers more because the monthly payment will be less. In addition, if the HELOC you qualify for has a variable interest rate, choosing a home equity loan gives you a stable monthly payment. On the other hand, if you only need a modest loan, a HELOC can keep you from paying interest on an excessive lump sum.

Which has a higher interest rate: a HELOC or home equity loan?

A home equity loan usually has a fixed interest rate, while HELOCs have variable or adjustable interest rates. A fixed interest rate is consistent throughout the loan. On the other hand, variable rates fluctuate with the economy, creating uncertainty for the borrower. While variable rates can dip beneath fixed rates, they can also result in more expensive monthly payments.

What is a ‘good’ credit score?

Credit score standards vary by lender, and scoring can differ between credit bureaus. That being said, a good credit score usually ranges between 670 to 739.

The Bottom Line

While a lower credit score may hinder your chances of qualifying for a home equity loan, it still may be worth looking into. To improve your chances of getting a home equity loan with bad credit, consider reviewing your credit report for errors, lowering your debt-to-income ratio (DTI), calculating your equity and finding a co-signer.

Remember, timely payments and proactive efforts to address credit challenges can help improve your credit score over time, making it more likely for you to qualify for a home equity loan in the future.

You don’t need a perfect credit score to get approved for a loan. You can to receive terms and rates for a home equity loan.

Turn your home equity into cash.

See how much you could get.


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