Receiving a Home Equity Loan with Bad Credit – Compass Mortgage

If you have bad credit and you want to get a home equity loan, you will most likely need to have a certain amount of equity in your home, a low DTI, and a healthy income. Otherwise, financial institutions might simply turn you away.

It isn’t impossible to qualify for a home equity loan if you have bad credit, but it does mean that the process isn’t quite as simple as it is when you appear to be a low-risk applicant.

What should you do if you want to borrow money from your home’s equity, but your credit has seen better days?

Let’s take a look at everything you need to know.

Is it Possible to Qualify for a Home Equity Loan with Bad Credit?

If you have bad credit, you might be wondering if you are completely out of luck when it comes to getting a home equity loan. Luckily, though, not all lenders have the same requirements for qualifying for mortgages and loans. This means that you can take a look at a number of different lenders to figure out which one will offer you the best loan terms and interest rate.

There are a number of requirements that are commonly shared between lenders when it comes to home equity loans. These include:

  • A minimum credit score of 621
  • Having a certain amount of equity in your home, generally between 15 and 20%
  • A history of paying bills on time
  • A DTI maximum of between 43 and 50%
  • A history of stable employment and income

There are a number of lenders out there that might offer home equity loans to people who have credit scores as low as 620. However, it can be hard to track these down. There are also some lenders that don’t state the minimum credit score they require, meaning you might have a better chance with some of these financial institutions.

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Bad Credit Home Loans: How to Apply for a Home Equity Loan with Bad Credit

There are a number of things you’ll want to do before you apply for a home equity loan with bad credit. Let’s take a look at the necessary steps.

Take a Look at Your Credit Report

The first thing you will want to do is check your credit report. Normally, you are only allowed to see your credit score from each of the major bureaus once a year for free. However, because of the Coronavirus pandemic, you can check your credit score for free on a weekly basis until April 20, 2022.

Look for errors on your credit report or determine where you can improve your credit before you apply.

Determine Your Debt-to-Income Ratio

Your debt to income ratio is a simple formula where your monthly debt obligations are divided by your monthly gross income. You will want to add up how much debt you have each month and divide it by how much you make each month to get your DTI.

If you want to qualify for a home equity loan, it’s ideal to have as low a DTI as possible.

Check Into Your Equity

The next step is to look into how much equity you have. Most mortgage companies will require that you have 15-20% equity in your home. You will find that you’re offered better rates the more equity you have.

Think About How Much You Need

No matter what type of loan you’re taking out, it can be tempting to take out more than you need. After all, what if something unexpected happens?

Most mortgage lenders will offer up to 80-85% of your home’s value after subtracting the mortgage obligations that exist. However, other lenders will offer a higher percentage of your home’s value.

You actually don’t want to take out a bigger loan than you want to. Otherwise, you will end up paying more in interest and have higher monthly payments.

Evaluate Available Interest Rates

Another important factor is the interest rates that are available to you. You will find that you’re offered higher interest rates the lower your credit score is.

If you’re looking for a good interest rate, Compass Mortgage can help!

Find a Co-Signer

If you don’t qualify for a loan of your own (and this is true for Fannie Mae loans and mortgage loans as well) you might want to get a co-signer. If the co-signer has a better credit score and other financial history, this can help you qualify.

Remember, though, if you don’t pay back the loan, your co-signers credit will suffer along with your own.

Consider Improving Your Credit Before Applying

One of the best ways to improve your chances of being approved for a home equity loan is to improve your credit. You can also work towards lowering your debt to income level.

It will take time to fix your credit as well as discipline. However, it can make it much easier to borrow money and save you tons of money in interest in the long run.

Talk to a Lender You’ve Worked with Before

One other tactic for getting a home equity loan with bad credit is to talk to a lender that you’ve worked with before. They might be more willing to figure out something that works for you if you have an existing relationship.

Are You Looking for a Better Experience When it Comes to Working with a Mortgage Company?

As you can see, having good credit generally makes it easier to get a home equity loan. However, you’re not completely out of luck if you don’t have an awesome credit score. You will want to explore all of your different options, though, as you might find it’s worth improving your credit before you apply.

Similarly, you might want to look into other options such as personal loans for bad credit.

If you’re buying a house and you have had negative experiences with mortgage companies in the past, you can rest assured that Compass Mortgage is different. You can learn more about how we stand apart from the crowd.