Unlocking Your Home’s Value: Home Equity Loans for Bad Credit

If you’ve owned a home for at least a few years, you’ve likely built up sufficient equity that you can tap. This money can be useful for a home improvement project, consolidating debt, or funding a major purchase. A popular option here is a home equity loan.

But what if you have poor credit? Do lenders provide home equity loans for bad credit? Learn more about the credit score typically needed to be eligible for a home equity loan, the interest rate you can expect to pay, and alternative financing options to consider.

In this article (Skip to...)

• Home equity loan credit requirements
• Lowest credit score for a home equity loan
• What’s considered “bad” credit?
• Qualifying for a home equity loan
• Home equity loan rates
• Home equity loan alternatives

What credit score do you need for a home equity loan?

Can borrowers get home equity loans with bad credit? The answer is probably, but it’s likely going to cost more.

That’s because, while your credit score isn’t the primary determining factor in qualifying for a home equity loan, having a low score can make you appear less creditworthy.

“Generally, home equity loans are given based on equity and not credit. But banks and lenders always check credit ratings to help them identify better borrowers,” says Christiana Ryals, a certified mortgage advisor and consultant for Fiona.com. “Some lender place their credit score requirements in the range of 660 to 680 as a minimum score.”

What’s the lowest possible credit score for a home equity loan?

However, the experts agree that obtaining a home equity loan with bad credit could still be possible if your credit score is at least 620. Any score below that will likely disqualify you from getting approved for a home equity loan.

“One of the reasons that the threshold is set at 620 is that people pursuing home equity loans almost always have a large primary mortgage to worry about – meaning their debt-to-income (DTI) ratio is rarely ideal,” explains Martin Orefice, CEO of Rent To Own Labs.

Having a desirable credit score is important, as it indicates your ability to repay your debts. The higher your credit score, the higher your chance of getting approved for financing and the better your odds of paying a lower interest rate.

What is considered “bad credit” for a home equity loan?

A lender can deem you as having “bad credit” based on several factors. A credit score below 620 is one of these criteria.

“Bad credit reflects any major derogatory events. These can include bankruptcy and foreclosure, which will discourage lenders from granting a home equity loan second mortgage,” says Tanya Blanchard, president of Madison Chase Capital Advisors. “Also, any late mortgage payments over the last 12 months could disqualify you.”

In determining your creditworthiness, lenders will also closely examine your DTI ratio, the amount of home equity you have accrued, and your loan-to-value ratio (more on these next).

Qualifying for a home equity loan with bad credit

According to Ryals, here’s what you need to be eligible for a home equity loan:

• 15% to 20% home equity. Equity is the difference between how much your home is worth and what you still owe on your mortgage loan. If your home is valued at $300,000 and you owe your mortgage lender $150,000, the difference would be $150,000, which equates to 50% equity. This is more than enough equity to qualify for a home equity loan.
• A loan-to-value (LTV) ratio of 85% or less. Your LTV compares your loan’s size to the home’s value. Lenders calculate the total loan value (your existing primary mortgage loan plus the home equity loan) when calculating this LTV ratio.
• A DTI ratio of 43% maximum. Your DTI ratio indicates your monthly debt obligations as a percentage of your gross monthly income.
• A credit score of 620 minimum.

“Your lender will also look at other factors, such as employment history and current income,” says Andrew Lokenauth, a finance and accounting expert.

As mentioned earlier, you should also have no bad marks on your credit, such as late payments or a previous foreclosure or bankruptcy.

Interest rates for home equity loans with bad credit

Expect to pay a higher fixed interest rate for a home equity loan if you have bad credit, meaning a score below 620.

“Today, the prime rate is 7.75%. For someone with a bad credit score, their rate would likely be prime plus at least 3%,” says Blanchard.

Lenders stipulate different interest rates for borrowers based on their credit rating/score.

“For example, Fifth Third Bank offers an annual interest rate of 5.72% to 12.65% on their home equity loans. Borrowers with higher credit scores can get the benefit of lower interest rates, whereas those with bad credit scores must settle for higher rates,” Ryals adds.

Alternatives to home equity loans

A home equity loan with bad credit isn’t your only choice. If you are denied or want another option, consider one of the following:

• Home equity line of credit (HELOC). This option is a line of credit secured by your property. You can expect qualification requirements similar to a home equity loan.
• Cash-out refinance of your primary mortgage loan. “The advantage here is that the fixed interest rate for a cash-out refi is often lower than for a home equity loan, but closing costs can be high,” cautions Ryals.
• Reverse mortgage. Seniors over age 62 are eligible for a reverse mortgage, wherein a lender offers either a lump sum or a line of credit or annuity, depending on your preferences, per Ryals.
• Personal loan. This option is often unsecured, meaning you aren’t required to put up any collateral like your home.
• Credit card. You can typically expect the highest interest rate among all these options.

Is it worth pursuing a home equity loan when you have bad credit?

Assuming you can qualify, it may still be worth it to get a home equity loan even if you have poor credit.

“Home equity loans can be especially useful for building the value of your property through renovations. Even in cases where your initial terms and interest rate aren’t great, a home equity loan used to quickly boost the value of your residence through major home improvements could pay for itself in the long run,” Orefice notes.

Ryals recommends trying to apply for a home equity loan with bad credit over other financing options like a credit card or personal loan, which will likely charge even higher interest. She says you may have better luck qualifying for a home equity loan with bad credit than getting approved for a personal loan or credit card with bad credit.

Blanchard, on the other hand, would think twice before applying for a home equity loan when you suffer from weak credit.

“I would not pursue a home equity loan until I cleaned up my credit. If you pursue it with bad credit, you will probably be denied,” she says.

Your next steps

Eager to explore a home equity loan? Lokenauth advises these next steps:

1. Check your credit score and credit reports before applying for a home equity loan.
2. Improve your credit score by paying off debts, disputing errors, and keeping low balances.
3. Shop around and compare rates and terms from different lenders.
4. Consider other options, such as a cash-out refinance or HELOC.
5. Prepare all necessary documentation in advance and respond promptly to any requests from the lender.

Frequently asked questions

What are the best home equity loan companies for bad credit?

It’s best to shop around for a home equity loan from a variety of different lenders, including credit unions, online lenders, and brick-and-mortar banks and lenders.

Research from Christiana Ryals indicates that several lenders currently provide enticing home equity loan offers to those who qualify, including:

• Fifth Third Bank, which offers home equity loans up to $500,000 with an interest rate ranging from 5.72% to 12.65%.
• Rockland Trust, which offers home equity loans up to $400,000 with interest rates starting at 5.74%.
• Third Federal Savings & Loan, which offers home equity loans up to $200,000 at interest rates starting from 5.99%.
• Flagstar Bank, which offers home equity loans up to $1 million with interest rates starting from 6.99%.

What is the minimum credit score for a home equity loan?

You’ll probably need at least a 620 credit score to qualify for a home equity loan. Some lenders require a higher credit score.

How much can I borrow with a home equity loan?

The most a lender will allow you to borrow with a home equity loan is usually up to 80% to 85% of the equity you’ve accrued in your home.

How long does it take to get a home equity loan?

From the date of application through closing, it can take anywhere from two weeks to two months, depending on the lender. It often takes around 45 days to close on a home equity loan.

What are the best home equity loan alternatives if you have bad credit?

If you suffer from poor credit, explore other options, such as a cash-out refinance of your primary mortgage loan, a home equity line of credit (HELOC), a reverse mortgage, a personal loan, or credit cards.