Can You Get a Home Equity Loan with Bad Credit?
You don’t need spotless credit to qualify for a home equity loan — but you will need more income, more home equity and less total debt than someone with good credit. Your loan will also have a higher interest rate, though it may be worth it if you need to pay off high-interest debt or make home improvements to boost your home’s value.
We’ll go over the requirements and give you a list of lenders to consider if you’re searching for a home equity loan with bad credit.
How to qualify for a home equity loan with bad credit
A home equity loan is riskier for a lender because it’s a “second mortgage” — this means it’s repaid after your first mortgage if you default on your loan. Lenders guard against this increased risk with tougher requirements, but you can shop around for a lender that suits your needs.
What counts as bad credit?
“Bad” isn’t a term used by the credit bureaus that track your credit score. However, for the purposes of getting a home equity loan, a credit score below 680 is considered “nonprime” or “subprime” and may make it difficult to get approved.
The easiest way to get a home equity loan when you have bad credit is to have both a low debt-to-income (DTI) ratio and loan-to-value (LTV) ratio. (We’ll dive into both of those metrics in more detail below.)
But if getting a home equity loan with your current credit score and finances isn’t in the cards, you may have to put things on hold and take some time to rebuild your credit.
Learn more about how to improve your credit score.
Home equity loan requirements
Most lenders expect you to meet the following requirements for a home equity loan:
- Credit score: 680 minimum
Most home equity lenders require at least a 680 credit score, though some are still willing to lend you money even if you can’t quite meet that bar. They’ll verify which types of accounts you use, how much you owe, how long the accounts have been open and whether you’ve paid the accounts on time — all of which are factors that impact your credit score.
- Home equity: 15% minimum
Home equity lenders typically require that you retain at least 15% equity in the home. Equity is the difference between your home’s market value and your current mortgage balances. It can help to think of it as your “stake” in the home, or the portion that you own outright.
- Loan-to-value ratio: 85% maximum
A loan-to-value (LTV) ratio measures how much your total loan amount is compared to your home’s value. Your current loan balance plus your new home equity loan balance can’t exceed your lender’s LTV ratio limits. It’s common for 85% to be the limit, but some lenders may offer 100% LTV home equity loan options.
- Debt-to-income ratio: 43% maximum
You’ll need to prove you earn enough to cover your current monthly bills, plus the new home equity loan payment. Usually, the percentage of your gross monthly income used to repay debt, known as your debt-to-income (DTI) ratio, can’t be higher than 43%. However, lenders may set even stricter requirements for borrowers with bad credit.
How to find the best bad credit home equity loan lenders
The best way to find a home equity loan is to comparison-shop with at least three to five lenders. Below are several lenders that accept lower-than-average credit scores, some of whom also appear on our list of the best home equity lenders of 2023:
|Lender||LendingTree’s rating||Minimum credit score||Maximum LTV||Maximum DTI||Lender review|
|640||95%||50%||Read our review|
|680||90%||45%||Read our review|
|700||Not disclosed||Not disclosed||Read our review|
Pros and cons of a home equity loan with bad credit
Low rates: Interest rates are lower than personal loan or credit card interest rates
Quick funding: Funds are disbursed quickly and can be used for any purpose
Predictable payments: Fixed-rate payments stay the same for the life of the loan
Tax benefits: Interest may be tax-deductible if used for home improvements
Foreclosure risk: Lenders could foreclose and you could lose your home if you default
Fees and costs: Interest rates and monthly payments will be higher than if you had good credit
Loan limits: You may be limited to a lower loan amount because your credit is low
Tax implications: Interest isn’t tax-deductible if it’s used for anything besides home improvements
How to get a home equity loan with bad credit: 6 steps
The application process for a home equity loan with bad credit is similar to getting any other type of mortgage, but there are a few extra steps you’ll need to follow.
1. Gather information about your current mortgage
Home equity lenders will need a copy of your most recent monthly mortgage statement before they’ll make a final home equity loan offer.
2. Check your home’s value
If you’re not sure how much your home is worth, you can use a home value estimator or get a broker price opinion. However, the lender will usually order a home appraisal to confirm the value, so any valuation you get before that should be considered an estimate.
3. Calculate how much you might be able to borrow
Once you know your home’s value and your current mortgage balance, a home equity loan calculator can help you estimate how much you may qualify to borrow. Lenders calculate your maximum home equity loan amount by multiplying your home’s value by the max LTV ratio they allow, and then subtracting your outstanding mortgage balance. A home equity loan calculator simply does the math for you, and the result it gives can help you decide whether the full application is worth the effort.
4. Write letters of explanation for your bad credit in advance
If you’ve had some tough financial times, write a letter to explain to lenders what happened and how you’ll be able to repay a home equity loan. Be prepared to provide documentation — such as bankruptcy papers or divorce decrees — that helps explain your financial situation.
5. Apply with three to five home equity lenders
You may need to show extra patience and shop around to get a home equity loan with bad credit, since not all lenders offer them. Using a home equity loan comparison tool can save you time by allowing you to enter your information and get calls from lenders who want your business.
6. Provide your documents and close your home equity loan
Once your home equity loan is approved, the process is similar to getting a regular mortgage. The lender verifies all the information from your application and, once it’s finalized, you’re ready for closing. After you sign your paperwork, you’ll receive the funds from your home equity loan at the end of your right-to-cancel period, which lasts for three business days.
Home equity loan alternatives
If you’re not quite sure that a home equity loan could meet your financial needs, consider these other equity-tapping loan options.
Home equity line of credit for bad credit
A home equity line of credit (HELOC) works a lot like a credit card, except it’s secured by your home equity. For a set time called a draw period, you can borrow from your credit line — it’s often as simple as swiping a card. Once the draw period ends, though, you won’t be able to use the credit line anymore and must repay your balance in monthly installments. HELOCs typically come with variable interest rates.
Read more about current HELOC rates
It may make sense to choose a HELOC over a home equity loan if you’re going to be making multiple purchases or don’t want to limit yourself to a fixed loan amount. A HELOC is more flexible because you can use, repay and then reuse your line of credit as much as you’d like during the draw period.
→ Common ways to use a HELOC include home renovations, business startup costs, debt consolidation and education expenses.
On the other hand, if you’re covering a single big expense, a home equity loan may better suit you. Or, perhaps you just want a fixed interest rate and payments that won’t change.
→ Common ways to use a home equity loan include covering an unexpected car repair, purchasing a new appliance or making small home improvements.
Common features of HELOCs include:
- Up to a 10-year draw period
- The option for interest-only payments during the draw period
- Variable interest rates for the life of the credit line
- Annual maintenance fees, membership fees and termination or prepayment fees
- Terms of five to 20 years
Cash-out refinance with bad credit
Conventional and government-backed loan programs allow you to use a cash-out refinance to replace your existing mortgage with a larger loan amount and pocket the difference. If current mortgage rates are low or your credit scores are below minimum standards for a home equity loan, a cash-out refi program may be right for you.
A cash-out refinance typically comes with:
- Lower interest rates compared to a home equity loan or HELOC
- Higher closing costs (because you’re taking out a larger loan)
- The ability to get approved for up to 80% of your home’s value with a conventional or FHA cash-out refinance
- A borrowing limit of up to 90% of your home’s value if you’re a military borrower eligible for a VA cash-out refinance
- DTI ratio limits up to 50% for conventional and FHA loans, and up to 41% for VA loans
- Longer repayment terms (up to 30 years)
Personal loan for bad credit
A personal loan is unsecured and typically comes with higher rates and a shorter repayment term than a home equity loan. Because it’s not secured by your home, there’s no risk of losing your home if you default on a personal loan.
Borrowers with credit issues will be pleased to find that personal loans for bad credit for credit scores as low as 300.
Personal loans typically allow you to:
- Prequalify without taking a credit hit
- Use the money as you wish, for almost anything
- Avoid securing the loan with a home or other collateral
- Have a fixed interest rate and regular, consistent payments that won’t change
- Choose a no-fee option if you’d prefer
- Receive funds quickly, in one to seven days on average
Reverse mortgage with bad credit
If you’re 62 years old or older, you may be eligible for a reverse mortgage, which allows you to convert your home equity into income without making a monthly payment. The catch: Your loan grows over time instead of shrinking, as the monthly interest is added to your loan balance.
Features of a reverse mortgage include:
- More options to receive your equity than you’d have with a home equity loan, including monthly payments, a credit line or a lump sum
- No minimum credit score requirement for the home equity conversion mortgage (HECM), the most common reverse mortgage type
- Higher closing costs than a home equity loan, with lender fees up to $6,000
- Losing home equity over time because your loan balance grows instead of shrinks
- Requirement to prove you aren’t delinquent on any federal debt and can pay ongoing property taxes, homeowners insurance and maintenance costs