Home equity loans require your home to serve as collateral when you borrow. But, unlike with a first mortgage, home equity loans are second liens. This means your primary mortgage lender gets first dibs on the home if you default. Since second mortgage lenders can’t collect as easily as primary mortgage lenders, getting a home equity loan with bad credit can be a challenge.
The good news, however, is that there are steps you can take to improve your chances of getting a home equity loan. There are also some lenders willing to provide loan funding to high-risk borrowers, even when their credit score isn’t great.
This guide to home equity loans for bad credit will help you understand how you can improve your chances of borrowing, while also providing information on some bad credit home equity loan lenders.
On this page:
- How to Improve Your Chances of Getting a Home Equity Loan
- Companies That Offer Home Equity Loans with Bad Credit
- Repaying Your Home Equity Loan Might Improve Your Bad Credit
- Alternatives to Home Equity Loans
- Between $15,000 and $150,000 in funding
- Approval in 5 minutes, funding in as little as 5 days
- 5, 10, 15, or 30-year terms
- Closing in as few as 10 days
- Fast, Easy, and 100% Online Application Process
- Get your rate quote instantly without affecting your credit
- Borrow up to 100% of your home’s value
- Low fixed rates | Loans from $25-500k
- 5-30 year terms | Close in as little as 11 days
How to Improve Your Chances of Getting a Home Equity Loan
Home equity loan and HELOC requirements are pretty similar for most lenders.
Typically, lenders evaluate risks associated with giving a would-be borrower a loan against the equity in a collateral property. Lenders have some common factors they’ll look at to assess this risk. These factors may include:
- Monthly income (should be stable for one to two years before applying)
- Credit score (should be at least higher than 620 for most lenders)
- How much equity you have in the property (should have at least 15% to 20% equity in the property)
- A good debt-to-income ratio
If you can’t satisfy the factors listed above, you should consider taking the following steps to improve your chances of approval.
Work on Improving Your Credit Score
While some lenders will approve your application with a credit score as low as 620, typically lenders want to see a higher score. And, if you’re approved with a low score, you’ll pay higher interest rates and have a higher monthly payment.
If your score is below 620, you’ll want to increase it as quickly as possible. While there’s no magic formula for immediately raising your credit score, there are steps you can take to start boosting your score to help you qualify for a loan with a lower interest rate.
1) Check Your Credit Report for Errors
You can get a free credit report from each credit reporting agency every year. As you look over your report, make sure you actually opened all of the accounts listed and check to see if there have been any inquiries made in your name that you don’t recognize.
Accounts you didn’t open and inquiries you didn’t make could suggest identity theft. You’ll also want to ensure any accounts you’ve paid off aren’t showing an outstanding balance.
2) Review Credit Card Balances and Revolving Debt
Take a hard look at credit card balances and other revolving debt and make a plan to pay off loans as quickly as possible. If you can reduce your credit used down to 30% of credit available to you, this will improve your credit utilization ratio, which can raise your credit score.
Reduce Your Debt-to-Income Ratio
Your debt-to-income ratio is the sum of all of your monthly obligations divided by your gross monthly income. If it’s higher than 35% to 40%, it can be a sign you’re living above your means and may be at risk of defaulting on your loans.
To lower your debt-to-income ratio, you’ll need to either increase your income or reduce your debt. You can look at side gigs to make some extra money, cut back on dining out or media streaming services, or even sell things you no longer use.
By bringing in a bit more money, you’ll not only increase your income but can also make extra payments on debt, effectively doubling your efforts.
Build Equity in Your Home
You need equity in your home to borrow against it, and there are a few ways you could increase it.
Making a larger down payment on a home results in more equity since you put more money in to start out. But, if you’re already in your home, you can’t go back and increase your down payment.
If you can afford to pay more than your monthly payment amount on your mortgage or can pay on a biweekly schedule, you can pay down your balance more quickly and build more equity.
If it’s been a few years since you had your home appraised, you could also have that done again. If the value comes back as $350,000 but the last appraisal was $300,000, you just gained $50,000 in equity. This is only recommended if home values have gone up since you last got an appraisal.
Since the loan interest rate is a measure of loan risk, borrowers with bad credit should expect to pay more than the advertised home equity rate. This can significantly increase loan costs. For example, say you’re borrowing $10,000 for 10 years.
- If you have a good credit score and qualify for a loan with a 6% interest rate, monthly payments will be $111.
- If you have a bad credit score and qualify for a loan with a 12% interest rate, monthly payments will be $143.
As you can see, high interest loans will result in monthly payments being much higher over time than if you had good credit.
Where to Look
Since home equity loan interest rates vary by lender, it’s important to shop around for the lowest interest rate. When you start shopping around, start with your bank where your everyday accounts are. If you already have good history with them, they may be more likely to approve your loan based on that history instead of only looking at your FICO score.
Next, take a look at online lenders. There are several that specifically offer home equity loans to people with lower credit scores. Most of them will allow you to check your interest rate without doing a hard credit inquiry that will affect your FICO score.
Companies That Offer Home Equity Loans with Bad Credit
In order to find lenders that might give you a home equity loan for bad credit, it’s helpful to use an online comparison tool so you can see multiple quotes and loan terms in one place. LendingTree is one site where you can compare your home equity loan options.
Home Equity Loans: Compare Loan Rates and Offers
- Make home improvements that add value to your home
- Get cash for a large purchase
- Consolidate debt
To complete your application, you’ll need to enter your name, date of birth, Social Security number, and the amount you’d like to borrow. LendingTree will do a soft credit inquiry that won’t affect your credit score, and partner lenders will offer details on mortgage rates you could qualify for depending on your type of loan.
Repaying Your Home Equity Loan Might Improve Your Bad Credit
There is some good news for bad credit borrowers. A home equity loan may actually help improve your credit score by diversifying the types of debt on your credit report. And, every month that you make on-time payments you’ll rebuild your payment history and credit score.
Alternatives to Home Equity Loans
You may find yourself in a position where you need cash but simply can’t qualify for a home equity loan. There are still a few options available you can look into.
Fund your present without risking your future
- Use your home’s equity to do what you want. No debt or monthly payments
- Invest in the future value of your home, giving you access to the money today
- Sell when you’re ready, whether it’s next year or 10 years down the road when the term is up
If you wanted a home equity loan to help your small business grow, Hometap may be able to help. Hometap is more flexible because they make you an investment offer – which is usually 5% to 15% of your home’s current value. In ten years you can either sell your home and pay a portion of the proceeds or simply pay the investment back through other means.
EasyKnock – Cash Out Without Moving Out
- Access your home equity in as little as 21 days
- No Minimum credit score or W2 Requirement
- Customized agreements that work for you
This company offers a product called Sell & Stay that lets you sell your home gradually but still live in it as a tenant. You can buy back the home at any time, and if you choose to move out, EasyKnock will put your home on the market and pay you the Sellout Value.
The EasyKnock product is technically called a residential sale-leaseback, and while it does offer access to liquid funds right away, it also means you’ll now be renting the home you owned. Any buybacks will also require a fee of 2.5% of the original sell value.
Home Equity Line of Credit
A home equity line of credit (HELOC) is a bit different than a loan. Instead of receiving a lump sum, you’re given a revolving line of credit based upon your equity. You can borrow up to your line of credit during your draw period and, with most HELOCs, can pay back your loan for up to ten years. During that draw period, you will only make interest payments.
If you don’t need to borrow a large amount up front, getting a smaller HELOC may be a better option. It may be easier to get approved for a smaller line if you have bad credit and you can choose to only use what you need, when you need it. It’s also more flexible than a home equity loan, but you’ll pay slightly higher interest rates.
Tap into your home equity to fund your life goals!
- Between $15,000 and $150,000 in funding
- Approval in 5 minutes, funding in as little as 5 days
- No appraisal, title or maintenance fees. Just one origination fee
Personal loans are another option to consider. These are unsecured loans you can get from a variety of lenders, some of whom will lend to borrowers with poor credit. Each lender has its own approval criteria, but you can compare several lenders and find the best one for your situation.
Personal loans typically have higher interest loans than home equity products but you don’t use your home as collateral so aren’t putting your home at risk. Expect to pay anywhere from 8% to more than 100% in interest depending on the amount you borrow, your credit score, and the lender you decide to use.
When you take a cash-out refinance, you refinance your first mortgage and borrow more than you currently owe. The difference is taken out as cash to be used for whatever you need. In some cases, you can lower your interest rate too, which can save you money on loan costs.
Just because you have bad credit doesn’t mean you can’t get the cash you need. Whether you choose to improve your chances of getting an equity loan or choose to go with an alternative, there are options open to you.