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How to Get a Home Equity Loan with Bad Credit

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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, fund an emergency expense, make a home improvement, or pay for your child’s college. But if you have bad credit, can you still get a home equity loan?

While it’s more difficult to get a home equity loan with bad credit, it’s certainly possible. Keep reading for more information on how it can be done.

What Credit Score Do You Need to Get a Home Equity Loan?

Although requirements for home equity loans vary between lenders, most lenders look for a credit score of 620 or higher. In addition, many of them require that you have at least 20% 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%. 

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. In addition, there may be restrictions on how much you can borrow when you get a home equity loan with bad credit. 

How to Get a Home Equity Loan with Bad Credit

Getting a home equity loan when you have bad credit 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 know you don’t have the best credit and 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 before you apply. 

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 and other types of revolving credit could all be good ways to increase your credit score. 

Once you’ve improved your credit score (you can find out what it is by requesting a free copy of your credit report at, apply for a home equity loan. You’ll likely find that the rates and terms you are able to secure are far more favorable than they would’ve been if you applied without improving your credit. 

Add a Co-Borrower with Good Credit

If you have a trustworthy friend or family member with good credit, consider adding them to your home equity loan 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. 

Remember that if you go this route, the co-borrower will be obligated to repay your loan if you’re unable to. If you’re not confident that you’ll be able to pay it off, adding a co-borrower can ruin a relationship with someone you care about it and put them in a bad situation. 

Shop Around

Even if you have bad credit, it’s possible to get a home equity loan. You just have to shop around and find a lender who will work with you. It’s especially important that you get home equity loan quotes from a variety of lenders if you have bad credit. That way, you’ll have a better chance of finding a lower rate.  

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. 

Getting a Home Equity Loan with Bad Credit: FAQs

Since home equity loans with bad 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% (90,000 divided by $150,000.)

Let’s say your lender lets you borrow up to 90% of your LTV. Ninety percent of your $150,000 home value is $135,000. To figure out how much you could borrow, you’d subtract your current loan balance of $90,000 from $135,000 and get $45,000. You’d be able to borrow $45,000 with a home equity loan. 

Now, the lower your credit score, the less equity you’ll likely be able to access. While most lenders allow borrowers to cash out their home equity as long as their LTV doesn’t exceed 80%, you may be capped at 70% 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 and above.

Why is it Harder to Get a Home Equity with Bad Credit?

Your credit score is an important factor that lenders look at when determining whether or not to approve you for a loan. Here’s why: 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. 

Pros of Getting a Home Equity Loan with Bad Credit

  • Fixed interest rates: Home equity loans with bad credit come with fixed interest rates, so you don’t have to worry about market chances increasing the amount you’ll have to pay.
  • Lump sum payment: You’ll get the proceeds of your loan in one lump sum payment.
  • Flexibility: You can use the money for essentially anything you’d like.

Cons of Getting a Home Equity Loan with Bad Credit

  • 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.
  • Fees: 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, a home equity loan with bad credit may be a good option. 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. If you can’t seem to get a lower interest rate or only need to borrow a small amount of money, a home equity loan may not make sense. 

Home Equity Loan vs. HELOC

Another way to borrow against your home equity is a 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.

Is it Better to Take out a Home Equity Loan or a HELOC if You Have Bad Credit?

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. It’s less risky than a HELOC because you’ll have fixed monthly payments that won’t fluctuate and borrow one lump sum of money rather than the opportunity to borrow more than you really need or can afford through a revolving line of credit. 

Home Equity Loan vs. 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 

Begin by visiting the bank or credit union where you have an account. You may find that they offer you more competitive rates and terms than other lenders because you already have accounts with them. Keep in mind, however, that banks and credit unions have stricter requirements so they may not approve you for a home equity loan if you credit score falls below a minimum threshold. 

Non-Prime Home Equity Lenders

Also known as alternative lenders, non-prime home equity lenders may be able to offer you a home equity loan that simply won’t be available at a bank or credit union. If you do choose a non-prime home equity lender, understand that you’ll likely get a higher interest rate.

Online Lender Comparison Sites

There are several online lender comparison sites that can help you easily find out the bad credit home equity loan options available to you. You’ll be able to receive several options based on your credit score and information and can save a great deal of time and hassle. 

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. 

Debt Settlement

If you work with a professional debt settlement company like Freedom Debt Relief, you may be able to get your debt settled for less than you owe. Because this option doesn’t require qualifying for a loan, having bad credit is not a problem. When you enroll in a debt settlement program, you’ll need to deposit money into a special account every month instead of staying current with your creditors. Then, the debt settlement company will reach out to your creditors to negotiate lower settlement amounts. 

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 activity and delinquencies. It can also assist you in getting rid of your credit card debt in 3 to 6 years through a debt management plan or DMP.

Although getting a home equity loan with bad credit is not easy, it is possible. Before taking one out, it’s important to shop around and understand all of your options as well as the alternatives available to you. 

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