How To Get a Home Equity Loan With Bad Credit

FICO Score
Typical Interest Rates

740 – 850
5.17%

720 – 739
5.55%

700 – 719
6.8%

670 – 699
8.17%

640 – 669
9.67%

620 – 639
11.17%

Courtesy of the Fair Isaac Corporation (FICO)

How To Get a Home Equity Loan With Bad Credit

You may still qualify for a home equity loan even with poor credit, but it becomes more difficult if your score falls below 700. Consider taking a few of the following steps to get into a better financial position if you decide you need to cash in on your home equity. Lenders are likely to reward you with a better interest rate.

Check Your Credit

The Fair Credit Reporting Act gives you the right to receive a free copy of your credit report once every 12 months. Lenders use reports to review where your credit stands when you apply for funding. You’ll want to know the details in the report, check for errors, and be prepared to answer any questions that lenders may have about it. You can order your free, yearly report at AnnualCreditReport.com.

You also should stay updated on your credit score by using resources offered by your bank, free credit scoring websites, or even apps such as Mint or Credit Karma.

Assess Your Equity

The loan-to-value (LTV) ratio is how lenders assess your equity based on how much you owe on your mortgage. On average, your LTV should be 80% or less. This means that you have at least 20% equity in your home. But those with lower credit scores may want to showcase higher equity.

Figure out your LTV by using this simple calculation: Current loan balance / current appraised value = LTV.

Look at Your Debt-to-Income Ratio

Your DTI ratio represents the total debt payments you make per month as a percentage of your monthly income. Most lenders look for 43% DTI or less for granting a home equity loan, but you should be below that level if you have a poor credit score. It gives lenders more confidence that you'll prioritize your loan payments.

Write a Letter Explaining Your Credit Score

Lenders want to know that you're trustworthy, and having more equity in your home boosts that confidence. But being prepared to address lenders’ concerns about a low credit score is another solid way to show that motivation. Be proactive in providing a letter to explain your credit history, current score, and actions you’re taking to build your credit.

Apply With Multiple Lenders

Shopping around for a loan with multiple lenders is a smart move, regardless of your credit score. Each lender will have different terms and conditions, such as annual percentage rate (APR), possible prepayment penalties, and credit insurance needs. Apply with several lenders you trust and have them compete for your business to get more favorable terms.

Be aware of dishonest lenders. Some may create specific terms under which they know you'll default. Watch out for lenders who want you to sign blank documents, change set terms, or push you to sign without time for a full review.

Alternatives to Home Equity Loans for Borrowers With Bad Credit

You may find that taking out a home equity loan isn’t the best idea with a poor credit score. There are other options to consider based on your financial outlook:

  • HELOC: A home equity line of credit (HELOC) acts like a credit card secured by your home. You can obtain as much money as you need within the draw period. Rates are variable, but you only pay for what you borrow.
  • Personal loans: Personal loans are unsecured and can be used for almost any purpose. These tend to come with less favorable terms, such as higher APRs based on credit scores. You should still shop around to contend with your weaker score.
  • Cash-out refinance: This pays off your first mortgage with a new, larger mortgage with different terms and timelines. The amount of your home equity decreases, but you may find it easier to find a lender that would accept a lower credit score in this scenario.
  • Reverse mortgage: A reverse mortgage converts older owners’ home equity into payments from lenders that are, essentially, buying out your ownership.

The Bottom Line

A home equity loan is a good option for a financial boost to cover emergency expenses, starting a business, or doing a home renovation. Having poor credit doesn’t necessarily deny you this opportunity but prepare to pay a higher rate, hold more equity in your home, and work harder to convince lenders that you’re a good risk.

You may want to pause the endeavor if you aren’t happy with the loan options you obtain with your credit score. Take the time to focus on improving your score instead, and pay special attention to your credit utilization, DTI, and the number of open accounts you have. Paying off debt, contacting creditors for support, and avoiding new purchases will all make you more attractive for a home equity loan.

Frequently Asked Questions (FAQs)

Can I get a home equity loan with a 500 credit score?

It’s not impossible to get a home equity loan with bad credit, but it's more difficult to get approved and find favorable terms when you have a score below 700. It may save you thousands of dollars to focus on improving your score before taking out such a loan.

What are other home equity loan requirements?

A credit score that meets the lender’s minimum, a maximum LTV of 80%, and a DTI below 43% are standard requirements for a home equity loan. Each lending institution has unique screening standards, and these numbers may look different for someone with a lower credit score.

When can you take out a home equity loan?

You can take out a home equity loan once you review and meet the basic requirements. The more equity you have in your house and the higher your credit score, the better your odds of finding favorable terms.

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