How to Get a Home Equity Loan with Bad Credit
Getting a home equity loan with bad credit generally requires you to have low monthly debts, a credit score of 620 or higher, and a home value of 20% more than you owe.
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If your credit score is under 620 or if you already have a lot of monthly debts, you may find it difficult to qualify for a home equity loan.
Still, it can be possible to get a home equity loan even with bad credit. Understanding lenders’ financial requirements will help you strengthen your application, or you may decide that a different loan is a better fit for your needs once you know all of your options.
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How to get a home equity loan with bad credit
Request a free credit report and check it for errors. You can dispute anything that’s wrong, since an error might be wrongly lowering your credit score. A score lower than 620 could make it difficult to qualify for a home equity loan with many lenders.
Calculate your debt-to-income ratio. This is the amount of monthly debts you have relative to your monthly income. Lenders ideally want to see a ratio of 43% or less.
Learn how much equity you have in your home. Lenders are typically willing to lend up to 85% of your equity, though the amount you get approved for may be lower if you don’t have a strong application.
Consider getting a co-signer. This may help you qualify for a home equity loan, but it comes with risk. If you can’t make your loan payments, the co-signer will be on the hook.
Try a familiar lender. You may have an easier time qualifying for a home equity loan by going to a lender that you already have a relationship with, such as the one that financed your mortgage.
Weigh alternative loan options. A cash-out refinance or personal loan might be a better fit.
Minimum credit score for a home equity loan
Credit scores count for a lot when determining your interest rate, and most lenders are looking for a score of at least 620. The higher your rate is, the more likely you are to be approved for a home equity loan.
You can request free credit reports from the three major credit reporting bureaus (Experian, Equifax and TransUnion). Check all three for any errors that may be lowering your score, and dispute them using the online portal associated with that bureau.
You’ll need to provide relevant documentation, which can include credit card statements, loan documents, bank statements, certificates, and any reports or complaints related to identity theft.
How to build your credit score
If you can afford to wait to take out a loan, building up your credit score will help you qualify with more lenders and get better rate offers. Some strategies to consider include:
Pay all bills on time, and make payments on any accounts that are past due.
Keep your credit cards open, but aim to pay down any credit card balances so they are below 30% of your limit.
Review your credit reports and dispute any errors.
Don’t apply for new loans or credit lines that will result in a hard credit inquiry.
Be wary of schemes that promise quick fixes. Instead, consider working with a credit counselor who can help you manage your debts.
Lower your debts
Qualified borrowers can get a home equity loan even with bad credit, but it helps to limit the amount of potential issues in your application. If you have a low credit score, you’ll have an easier time qualifying for a home equity loan if you don’t also have a lot of other debt.
Lenders calculate your debt by dividing it by your income. This is called your debt-to-income ratio, or DTI. The NerdWallet DTI calculator can help you find your ratio.
A DTI of 43% or less will put you in the sweet spot for most lenders. But if you shop around, you can find lenders that allow higher DTIs (i.e., higher monthly debt).
Ultimately, you have to be comfortable with your payment. If your DTI is on the higher end, you may feel more stretched with money each month.
Find out how much home equity you have
Your home equity is the value of your home, minus your mortgage or any liens. Most home equity lenders allow customers to borrow up to 85% of their home equity. However, with credit around or below 620, you might not qualify for this maximum amount.
NerdWallet’s home equity loan calculator will help you estimate how much you could qualify for.
Say your home's current market value is $300,000. You owe $200,000. Your LTV is 67%. If a lender allows you to borrow up to 80% LTV, you could pull $40,000 equity from your home:
$300,000 x 0.80 (80%) = $240,000 - $200,000 (what you still owe) = $40,000.
» MORE: NerdWallet home value estimator
Deciding between a home equity loan or HELOC
Home equity loans and HELOCs usually have the same requirements, and borrowers with bad credit will likely face the same challenges applying for either loan type. The real decision comes down to what works best for you — whether you need all of the cash up front, and whether you prefer a variable or fixed interest rate.
Features of the loan | HELOC | Home equity loan |
|---|---|---|
Loan funding | You can draw funds as needed, up to a certain limit (typically a percentage of your equity). | You receive a lump sum at closing (typically a percentage of your equity). |
Terms | Begins with a draw period (typically 10 years) with interest-only minimum payments. This is followed by a repayment period (often up to 20 years) that requires you to pay back principal and interest. | Repayment periods are often up to 30 years. Minimum payments include both interest and principal. |
Rates | Variable (though some lenders offer a fixed-rate option) | Fixed |
Borrowing limits | You can typically borrow between 80%-85% of the equity in your home. Some lenders allow for more. Use NerdWallet’s HELOC calculator for personalized details. | You can typically borrow between 80%-85% of the equity in your home. Some lenders allow for more. |
Lenders |
Other loan options to consider
Cash-out refinance
If you think you’re on the border of approval for a home equity loan, a cash-out refinance could be another option. This involves replacing your original mortgage with a larger one, allowing you to pocket the difference.
It’s not a second mortgage, so lenders have more flexible requirements and you may find it easier to qualify. Make sure to shop for lenders to find your best refinance option.
You’ll have a new mortgage interest rate and repayment terms, which will affect your monthly payments if rates have increased since you bought your home.
Personal loan
If you can’t qualify for a home equity loan, a personal loan may offer more flexibility when it comes to minimum requirements. NerdWallet’s roundup of the best bad credit loans highlights several personal loan options that serve borrowers with credit scores below 600. If possible, though, try to avoid lenders that charge interest rates that will make it difficult to keep up with monthly payments.
Home equity sharing agreement
If you are in difficult circumstances and can’t qualify for another kind of loan, another option is a home equity investment. This allows you to access some of the equity in your home in exchange for giving an investment company part of the future value of the home.
Home equity investors can have lower credit score thresholds, with some requiring a minimum score of 500.
These loans can be easier to qualify for than home equity loans. And they don’t require monthly payments. But they can also be much more expensive if the value of your home grows over the life of the loan. Because the investment company gets a percentage of the home’s value, the repayment can amount to tens of thousands of dollars more than the original loan amount. This repayment comes due when the loan term ends (often after 10 years) or when the house is sold.