How to Get a Home Equity Loan with Bad Credit

How to Get a Home Equity Loan with Bad Credit

Anna Baluch

September 25, 2019

How to Get a Home Equity Loan with Bad Credit

A home equity loan can give you the chance to borrow money against the equity in your home. So, what exactly is equity? Equity is the difference between the amount you owe on your home and how much it’s worth. It increases as you pay down your mortgage and your property goes up in value.

When you take out a home equity loan, you can use the money to consolidate high-interest debts, cover an emergency expense, make a home improvement, or pay for your child’s college education. But if you have bad credit, can you still get a home equity loan?

While it’s more difficult, we’ll show the you how to get a home equity loan with bad credit.

What credit score do you need to get a home equity loan?

Although requirements vary, many lenders look for a credit score of 620 or higher. In addition, many of them require that you have at least 20 percent equity in your home, a good payment history, and stable employment and income. They also prefer for your debt-to-income ratio (how much you owe vs. how much you earn) to be a maximum of 43 to 50 percent.

Keep in mind that if you get approved when you have a credit score that’s lower than 620, you may face a higher interest rate, which can add to the overall cost of your loan. Part of learning how to get a home equity loan with bad credit is understanding what the limits might be on how much you can borrow.

The basics of how to get a home equity loan with bad credit

It can be challenging, but following these tips could help you secure a home equity loan, even if you’re dealing with a poor credit score.

Improve your credit and apply on your own

If you’re not looking for a home equity loan right away, it may be well worth your time and effort to focus on improving your credit first. Paying your bills on time, only applying for new credit accounts if you really need them, avoiding cancelling unused credit cards, and paying off debt while keeping balances low on credit cards are all good ways to help increase your credit score.

Once you’ve improved your credit score (request a free copy of your credit report), you can apply for a home equity loan.

Add a co-borrower with good credit

If you have a trustworthy friend or family member with good credit, consider adding them to your application. Doing so may significantly increase your chances of approval. While you can’t use your co-signer’s credit score in place of yours when applying for a loan, lenders can blend your scores or average them and view you as a less risky borrower.

If you go this route, remember that the co-borrower will be obligated to repay your loan if you’re unable to.

Shop around

It’s important to get quotes from a variety of lenders if you have bad credit. Banks, credit unions, and other lenders all offer home equity loans. Some of these lenders are more lenient with home equity loan approvals than others and some of these lenders will offer better terms to people who have bad credit than others will. So do your homework, explore your options, and don’t settle for the first rate you get.

How to get a home equity loan with bad credit: FAQs

Since getting a home equity loan with poor credit can get complicated, we created this handy list of frequently asked questions.

How much can you borrow if you get a home equity loan with bad credit?

There are a number of factors that determine how much you can borrow with a bad credit home equity loan. Your loan-to-value ratio (LTV) plays a vital role. For instance, if your home is worth $150,000 and you have a $90,000 mortgage, your LTV is 60 percent (90,000 divided by $150,000.)

The lower your credit score, the less equity you’ll likely be able to access. So, while most lenders allow borrowers to cash out their home equity as long as their LTV doesn’t exceed 80 percent, you may be capped at 70 percent or lower if you don’t have the best credit. Also, you’ll likely receive a higher interest rate than someone who has a credit score of 620 or above.

Why is it harder to get a home equity loan with bad credit?

If you have a lower credit score, lenders will view you as a risky borrower who may not pay them back in full. To mitigate the risk they may be taking on by lending you money, they’ll likely offer you a higher interest rate than they would if you had good credit. A higher interest rate can make a home equity loan more expensive in the long run.

What are the pros and cons of home equity loans with bad credit?

As with any financial product, there are pros and cons of home equity loans with bad credit (you may also want to get familiar with some common mortgage terms).


  • Fixed interest rates. You won’t have to worry about market fluctuations increasing the amount you’ll have to pay.

  • Lump sum payment. You’ll get the proceeds of your loan in one lump sum payment.

  • You can use the money for essentially anything you’d like.


  • Higher cost of borrowing. If you have bad credit, a home equity loan with a higher interest rate can make your loan more expensive.

  • Home at risk. If you default on your loan, your lender may foreclose on you and take away your home.

  • You’ll have to pay closing costs and fees to take out a home equity loan.

When is it a good idea to get a home equity loan with bad credit?

If you need a large amount of cash to pay for a major expense, then learning more about how to get a home equity loan with bad credit may be a smart move. This is particularly true if you’re able to land one with a lower interest rate than you can get with a credit card or personal loan.

There are some other options that involve using your home equity, though, such as a home equity line of credit (HELOC) or a shared equity agreement.

Home equity line of credit (HELOC)

Unlike a home equity loan where you get a lump sum of money, a HELOC works like a credit card. With a HELOC, you can borrow up to a certain amount of money and take out what you need as you need it for a “draw period” that’s usually 10 years.

During the draw period, you typically only need to pay the interest so your minimum payments will be very low. Once the draw period comes to an end, you’ll need to pay off the balance of your loan via a payment plan you and your lender agree to. It’s important to note that HELOCs come with variable interest rates, so they can increase or decrease from month to month depending on the underlying benchmark rate.

If you have bad credit because you tend to overspend and have difficulty making payments on time, a home equity loan is a safer bet.

Shared equity agreements

A shared equity agreement is another alternative to a home equity loan. It can give you the chance to cash out some of the equity in your home by giving an investor a stake in your property. Although an investor won’t have the right to live in the home or rent it out, they can benefit if your property increases in value. It may be a good option if you don’t have much cash or the best credit, yet have a good amount of equity in your home.

Where to apply for a home equity loan if you have bad credit

If you’re looking for a home equity loan with bad credit, there are a number of lenders that may be able to help you out.

  • Banks and credit unions. The bank or credit union where you have an account may offer you more competitive rates and terms than other lenders. However, banks and credit unions have stricter requirements so they may not approve you for a home equity loan if your credit score falls below a minimum threshold.

  • Non-prime home equity lenders. Non-prime (or “alternative”) lenders may be able to offer you a home equity loan that simply won’t be available at a bank or credit union. However, you’ll likely get a higher interest rate.

  • Online lender comparison sites. These sites can help you easily find out the bad credit home equity loan options available to you based on your credit score and other information.

Alternatives to home equity loans with bad credit

If you’re trying to get your finances under control, there are alternatives even if you have bad credit, including debt settlement and credit counseling.

  • Debt settlement. If you work with a professional debt settlement company, you may be able to get your debt settled for less than you owe. When you enroll in a debt settlement program, you’ll deposit money into a special account every month instead of staying current with your creditors. The debt settlement company will negotiate lower settlement amounts with your creditors.

  • Credit counseling. By working with a credit counseling agency, you can get out of debt through a monthly payment plan that fits your situation. Credit counseling can make the debt payoff process less daunting and protect you from elinquencies. It can also assist you in getting rid of your credit card debt in three to six years through a debt management plan or DMP.

It’s important to understand exactly how to get a home equity loan with bad credit if it’s the right option for you. But first, you’ll want to shop around and understand all of your options as well as the alternatives available to you.

Regardless of your credit rating, you can get debt under control

If you’re struggling with debt or worried about falling behind on payments, you might be considering a home equity loan. Freedom Debt Relief can help you understand these loans as well as your other options for dealing with debt, including our debt relief program. Let our Certified Debt Consultants help you find a solution to put you on the path to a better financial future. Find out if you qualify today.

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Anna Baluch is a freelance writer who enjoys writing about all personal finance topics. She’s particularly interested in mortgages, retirement, insurance, and investing.