If you're considering a home equity loan, you're probably a homeowner who needs funds for a major purchase or project. Whether you're planning a major home renovation, consolidating high-interest debt, or covering a large expense like college tuition or medical bills, a home equity loan can be a practical financing option.
As a homeowner, you can borrow money using the equity you've built in your home as collateral to help pay for these expenses. If you have bad credit, qualifying for a home equity loan may be more challenging, but it doesn't necessarily mean it's out of reach.
Can you get a home equity loan with bad credit?
Bad credit does not disqualify you from getting a home equity loan. However, the process may be more challenging, as lenders will typically look more closely at factors like your income, debt, credit history and the amount of equity you have in your home.
Home equity loan lenders typically require a credit score of at least 620, though many prefer 660 to 680 or higher. The higher your score is, the more likely you are to be approved for a home equity loan.
A "bad" credit score may feel like it closes the door on your options, but the reality is that it’s only one part of your entire financial picture. By understanding what lenders consider and preparing your application carefully, you’ll understand what will increase your chance of getting approved.
How to get a home equity loan with bad credit
Start by tackling the biggest thing standing between you and approval. Lenders pay close attention to three major factors: equity, credit score and debt-to-income ratio.
Which factors are helping you and which ones are holding you back? Focus on your weakest area first while using your strengths to your advantage.
- Use your home equity to your advantage. 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 credit score. If you have a lot of equity in your home, this may help strengthen your application, even if your credit score is lower. Lenders may view significant equity as a sign that you have more security behind the loan. Start by checking with your current mortgage lender to understand their credit score requirements before applying. You may have an easier time qualifying for a home equity loan by going to the lender you already have a relationship with.
- Improve your credit score if it’s your biggest weakness. A low credit score could make it difficult to qualify for a home equity loan with many lenders, so improving it is worth prioritizing. 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. Pay down credit card balances, make payments on time and avoid new debt to help show lenders you’re a lower-risk borrower.
- Lower your debt-to-income ratio (DTI). Your DTI is the amount of monthly debts you have relative to your monthly income. Lenders ideally want to see a ratio of 43% or less. If your monthly debts are too high compared with your income, reducing your debt or increasing your income can improve your chances of approval.
Remember, you do not have to fix everything at once. Every improvement can help strengthen your application. If your credit score is just above a lender's minimum requirement, you may receive a higher interest rate and qualify for a smaller loan. Even a 1% or 2% difference in the interest rate on a $50,000 loan can cost thousands of dollars more over the life of the loan.
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
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.
A DTI ratio 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). The NerdWallet DTI calculator can help you find your ratio.
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. NerdWallet’s home equity loan calculator will help you estimate how much you could qualify for.
How much can you borrow? An example
Let’s say your home is worth $400,000, and you still owe $250,000 on your mortgage. This means you have $150,000 in home equity.
If your lender allows you to borrow up to 80% of your home’s value, the maximum loan amount would be $320,000:
$400,000 × 80% = $320,000
Since you owe $250,000, you could potentially borrow up to $70,000 in additional funds:
$320,000 − $250,000 = $70,000
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 | Home equity loan | HELOC |
|---|---|---|
Loan funding | You receive a lump sum at closing (typically a percentage of your equity). | You can draw funds as needed, up to a certain limit (typically a percentage of your equity). |
Terms | Repayment periods are often up to 30 years. Minimum payments include both interest and principal. | 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. |
Rates | Fixed | Variable (though some lenders offer a fixed-rate option) |
Borrowing limits | You can typically borrow up to 85% of the equity in your home. Some lenders allow for more. | You can typically borrow up to 85% of the equity in your home. Some lenders allow for more. Use NerdWallet’s HELOC calculator for personalized details. |
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. Just know that rates on personal loans run high — often well into the double digits — so make sure the monthly payment fits your budget before signing.
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.
Explore more on
