Can You Get a Home Equity Loan With Bad Credit? A Complete Guide

Qualifying for a home equity loan can be more difficult if you have bad credit, but it’s not impossible. Lenders evaluate several factors beyond your credit score, including your income, debt-to-income ratio, and home equity.

Understanding how these factors influence approval can help you take the right steps to improve your chances. In this guide, we’ll break down how bad credit affects your ability to borrow against your home, explore ways to improve your approval odds, and compare alternatives for accessing your equity when traditional loans aren’t an option.

How bad credit affects home equity loans

Bad credit can make it harder to qualify for a home equity loan because lenders rely on your credit score to assess risk. However, your credit isn’t the only factor they consider.

Here’s how bad credit plays a role:

• Credit score thresholds: Most lenders require a minimum credit score of 620 for home equity loans. If your score is lower, approval will be difficult, and interest rates will likely be higher.
• Debt-to-income (DTI) ratio: A high DTI ratio (above 43%) can signal to lenders that you may struggle to make payments, reducing your chances of approval.
• Home equity: Lenders generally require at least 15% equity in your home. If you’ve built significant equity, it can offset concerns about a low credit score.
• Income stability: Even with bad credit, consistent income may reassure lenders that you can make payments.

Home equity loan requirements

To qualify for a home equity loan with bad credit, you must meet specific lender criteria:

• Credit score: The minimum is typically 620; some lenders may require higher scores for better terms.
• Loan-to-value ratio (LTV): Your combined mortgage and home equity loan balance can’t exceed 75% to 85% of your home’s value.
• Debt-to-income ratio: Lenders prefer a DTI of 43% or less.
• Home equity: You must have at least 15% equity in your home.
• Documentation: Be prepared to provide proof of income, recent mortgage statements, and details about your current financial situation.

Steps to improve your approval odds

Here are strategies to strengthen your application for a home equity loan if you have bad credit:

• Find a cosigner: A cosigner with strong credit can improve your chances of approval and better terms. (Not all lenders allow cosigners, but we found a few that do.)
• Reduce your DTI: Focus on paying down debts or increasing your income to lower your DTI.
• Build more equity: Pay extra toward your mortgage or get a new appraisal if property values in your area have increased.
• Let your spouse apply alone: If your partner has better credit, they may qualify for the loan without you. (See our list of lenders that you let apply for a home equity loan without a spouse.)
• Shop around: Some lenders specialize in working with borrowers who have bad credit—compare multiple lenders to find one willing to work with you.

Alternatives to home equity loans

You may find yourself in a position where you need cash but can’t qualify for a home equity loan. Consider these options.

Option	Best for
Home equity agreement	Homeowners with bad credit who want to access equity without monthly payments or interest
Home sale-leaseback	Homeowners who need immediate equity access but want to continue living in their home
Personal loan	Borrowers with no equity in their home
Cash-out refinance	Borrowers who can qualify for a lower interest rate on their mortgage
Reverse mortgage	Seniors with high costs in retirement
Retirement loan	Borrowers with a 401(k) or similar account who need short-term funds but can repay quickly.

Home equity agreement

With a home equity agreement, you get a lump sum in exchange for a percentage of your home’s future appreciation. Unlike a traditional loan, you won’t owe monthly payments or interest charges. This can be an option for borrowers who lack the credit profile for a loan but have significant equity.

Check out our list of the best home equity agreement companies.

Home sale-leaseback

In a sale-leaseback, you sell your home to a buyer or investor and then lease it back, allowing you to access your equity while continuing to live in the property. This option is often a short-term financial solution but requires careful consideration of lease terms and future plans.

See our list of the top home sale-leaseback providers.

Personal loan

You can get unsecured personal loans from various lenders, some of which will lend to borrowers with poor credit. Lenders have unique approval criteria, but you can compare requirements for bad-credit loans here to find an option that works for you.

Personal loans tend to have higher interest loans than home equity products, but you don’t use your home as collateral, so you aren’t putting your home at risk.

Cash-out refinance

When you take a cash-out refinance, you refinance your first mortgage and borrow more than you owe. You take out the difference in cash to use for whatever you need. In some cases, you can lower your interest rate too, saving money on loan costs. 

View our list of the best cash-out refinance lenders.

Reverse mortgage

A reverse mortgage provides homeowners over age 62 with a lump-sum payout against the equity in their property. The difference is that reverse mortgage borrowers aren’t required to make monthly payments on that loan. Instead, the debt is repaid once the borrower no longer lives in the home.

Interest charges accumulate on the reverse mortgage loan, but you don’t need to worry about paying them monthly. If you have bad credit, this option can be more attractive because your credit score won’t result in a higher monthly payment requirement.

Reverse mortgages push the cost into the future. You or your heirs must repay the debt if you move or pass your home to them. See the highest-rated reverse mortgage companies.

Retirement loan

Some people borrow against 401(k) plans or other retirement accounts, but this can come with penalties and affect long-term financial goals.

How to apply for a home equity loan with bad credit

Follow these steps to improve your chances of approval:

1. Assess your equity: Calculate your home’s value and subtract your current mortgage balance to determine how much equity you have.
2. Check credit requirements: Confirm the minimum credit score and DTI ratio for your chosen lender.
3. Gather documentation: Collect pay stubs, tax returns, bank statements, and mortgage details.
4. Explain your financial situation: Include a written explanation of why your credit is low (e.g., medical bills or divorce) and how you’ve improved.
5. Prequalify with multiple lenders: Use prequalification tools to compare rates and terms without hurting your credit.
6. Submit your application: Once you’ve chosen a lender, provide all required documentation and complete the application process.

FAQ

Can you get a home equity loan with no credit check?

Getting a home equity loan without a credit check is unlikely. Lenders use credit checks to assess your ability to repay the loan, which is critical when your home secures the money they’re lending. Some alternative lenders or specialized programs might offer loans with minimal credit checks, but these often come with higher interest rates and less favorable terms.

Can I get an FHA home equity loan with bad credit?

The FHA doesn’t offer traditional home equity loans, but you might qualify for an FHA cash-out refinance or FHA home equity conversion mortgage (HECM) if you are 62 or older. These FHA-backed options can be more accessible to those with bad credit, but you still must meet minimum credit score requirements and other eligibility criteria.

Lenders offering these products may look for a credit score of at least 500, but higher scores improve your chances of approval and better terms.

Can I get a home equity loan with bad credit if my home is paid off?

Yes, if your home is paid off, you might qualify for a home equity loan even with bad credit. However, your credit score will influence your interest rate and terms. Some lenders may be more willing to approve a loan because the home serves as collateral, but you might pay higher interest rates or additional fees due to the perceived risk.

What types of loans can I get using my house as collateral with bad credit?

Even with bad credit, you can use your home as collateral to access different types of loans. Options include a home equity loan, cash-out refinance, home equity agreement, and a reverse mortgage. Each option has unique requirements, so comparing lenders and terms is essential to finding the best fit for your needs.