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How To Get A Home Equity Loan With Bad Credit

6-Minute Read
Published on October 18, 2022

If you’ve been making regular mortgage payments for at least a few years, you’re probably familiar with the concept of home equity – the amount of your home that you really own. As you make payments and lower your home loan balance over time, your ownership or equity, in the property increases.

One of the biggest benefits of home equity is that it can be accessed and used for a number of projects, from home improvements to building a college tuition fund. You can tap into home equity in several ways, but one of the most popular options is a home equity loan.

But if your credit score needs work, you might be wondering whether it’s even possible to get a home equity loan with bad credit. If this sounds familiar, keep reading to learn more about your financing options and what you can do to give yourself the best chance of loan approval.

Can You Get A Home Equity Loan With Bad Credit?

A home equity loan is a type of second mortgage that allows homeowners to borrow against the equity in their home. If you’re in need of extra cash, a home equity loan might be a good option. But, if your credit score has taken a hit since you first purchased a home, you might be wondering if you’ll qualify for this form of financing.

The good news is that certain lenders make it possible for those with less than ideal credit to obtain home equity loans. Still, borrowers should be aware that qualifying for a loan with bad credit may be challenging and may mean less favorable loan terms, such as higher interest rates.

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Financial Requirements For Home Equity Loans

To tap into your equity with a home equity loan, you’ll first need to meet certain financial requirements. These requirements vary between lenders, but in general, approval for a home equity loan will require the following:

  • At least 15% – 20% in home equity
  • A minimum credit score of 620 (or up to 680, depending on the lender)
  • Debt-to-income (DTI) ratio of 43% or lower (though some lenders may allow up to 50%)
  • Proof of stable employment and income history

The Pros And Cons Of Getting A Home Equity Loan With Bad Credit

It may be possible to get a home equity loan with bad credit, but should you?

If you’re in need of cash for home improvements, debt consolidation or other pressing projects, a home equity loan may be an appealing solution. Consider all the potential advantages and disadvantages of this form of financing to make the best choice for you.


Even with a low credit score, getting approved for a home equity loan may mean reaping the benefits of:

  • Fixed-rate loan payments
  • Interest rates lower than other forms of financing, like personal loans
  • Quick access to funds
  • Freedom to use the money however you want
  • Tax-deductible interest when used for home improvements


For all the benefits, recognize that there are some drawbacks to getting a home equity loan with bad credit, including:

  • Higher interest rates and monthly payments than you’d get with good credit
  • Potentially lower loan amount than you’d get with good credit
  • Home is used as collateral to secure the loan

How To Get A Home Equity Loan With Bad Credit

If you’ve decided to pursue a home equity loan, there are steps you to take to give yourself a better chance of loan approval. In fact, following these steps may even result in better loan terms and interest rates, so let’s get into them.

1. Check Your Financial Health

The first step toward obtaining any loan is always to understand how your financial situation stacks up against the lender’s qualification requirements. With a home equity loan, this means meeting credit score, debt-to-income ratio and home equity standards.

First and foremost, you’ll want to check your credit report to see if you meet bare minimum credit score requirements. If your score needs to improve, check for any errors and consider paying off outstanding debt if you can afford to. This will also help to improve your debt-to-income ratio.

In addition to reviewing your credit report, you’ll also want to gather information about your mortgage. As mentioned previously, you’ll need to have at least 15% – 20% equity in the home to be considered for a home equity loan. And while you’re looking at your mortgage information, consider how an additional loan payment would factor into your monthly budget on top of your current costs.

2. Establish Your Desired Loan Amount

Got your financial health in good – or good enough – standing? Great! Now it’s time to determine how much cash you’re looking to obtain with a home equity loan. Of course, this begins with calculating how much money you realistically need to fund your planned projects, but this step will also mean checking loan-to-value (LTV) limits for your preferred lender.

An LTV ratio represents the total loan amount compared to the home’s value. In general, lenders will not allow the combined balance of your current mortgage and your home equity loan to exceed the home’s assessed value, so this is an important consideration to make when you’re calculating how much you can get with this type of loan.

And remember you should only take out as much as you need, as you’ll be making payments and paying interest on the full loan amount whether you use it all for your projects or not.

3. Get A Co-Signer

If you’re still concerned about your chances for loan approval or you’re looking to secure a better interest rate, consider enlisting a trusted friend or family member to co-sign the mortgage. But keep in mind that doing this will mean both you and your co-signer are financially responsible should you default on the loan.

4. Compare Lenders

Comparing lenders is always an important step in the process, as each mortgage lender will have its own unique requirements, loan terms and interest rates. This makes it crucial for borrowers to choose the best mortgage lender for their specific needs.

Be sure to consider each lender’s loan terms alongside their overall reputation during your search. After all, if you find a lender offering home equity loans to borrowers with bad credit scores but also uncover a history of poor consumer reviews, the promise of loan approval may not be worth the risk of working with a less than credible lender.

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Alternatives To Home Equity Loans For Bad Credit

If you aren’t sold on the benefits of a home equity loan or you’re worried about applying for one with bad credit, don’t worry – there are other options you can consider.

Boost Your Credit First

Not in a rush to tap into your home equity? If your planned projects can stand to be delayed, taking some time to build your credit score might be a good idea.

Paying off credit cards, establishing a steady payment history and disputing errors on your credit report can all help to boost your score. This will likely result in better interest when the time comes for you to pursue your home equity loan.

Consider A Home Equity Line Of Credit (HELOC)

If you aren’t sure whether a home equity loan is right for your situation, you could also consider a home equity line of credit (HELOC). A HELOC allows you to utilize your equity in your home similarly to a home equity loan with a few key differences.

Unlike a home equity loan, a HELOC functions like a credit card in that you are given a credit limit and have the ability to borrow against that limit over an extended period of time. The silver lining here is that you’ll only make payments and pay interest on the amount you actually use, so if you aren’t sure exactly how much cash is needed to fund your projects, this could be a good option to help you avoid borrowing more than you need.

But HELOCs often come with higher interest rates than what you’ll encounter with home equity loans, so be sure to keep all your financial goals and priorities in mind while comparing home equity loans and HELOCs.

Consider Personal Loans

Another financing option you can consider is a personal loan. There are different types of personal loans, from secured to unsecured, which may make it easier for people with bad credit to qualify. But keep in mind that like HELOCs, personal loans have higher interest rates than home equity loans.

Explore A Cash-Out Refinance

Looking to avoid an additional loan payment? Perhaps a cash-out refinance would be a better option. Unlike a home equity loan, which is a second mortgage on top of your first, a cash-out refinance provides you with an opportunity to refinance your existing mortgage while tapping into your home equity. This is done by refinancing the original loan for a higher loan amount, allowing you to take out the difference in a lump sum of cash.

In the battle of home equity loans versus cash-out refinances, cash-out refis offer lower interest rates, though they may be more difficult to qualify for.

The Bottom Line: Bad Credit Can Make Getting A Home Equity Loan More Challenging

Can you get a home equity loan with bad credit? The short answer is yes, though qualifying for this financing option may prove challenging for some borrowers.

But for some, the benefits of a home equity loan may outweigh the higher interest rates they’ll pay for having a low credit score. Just be sure to consider the pros and cons of all your options to determine if a home equity loan is right for your situation.

If you’re ready to tap into your home’s equity, apply for financing today to get started on projects from small-scale home improvements to large-scale remodels.

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Katie Ziraldo Headshot

Katie Ziraldo

Katie Ziraldo is a financial writer and data journalist focused on creating accurate, accessible and educational content for future generations of home buyers. Her portfolio of work also includes The Detroit Free Press and The Huffington Post.