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Home Equity Home Equity Loans

Home Equity Loans & HELOCs for Bad Credit

When taking out a home equity loan, your property will serve as collateral on the debt. Unlike a first mortgage, home equity loans are second liens. If you default, your primary mortgage lender gets first dibs on the home.

Since second mortgage lenders can’t collect on defaulted debts as easily, getting a home equity loan with bad credit can be challenging. 

This guide will help you understand how to improve your borrowing chances and where to find lenders offering home equity loans to borrowers with bad credit.

Where to get home equity loans with bad credit

The lenders reviewed below tend to prefer borrowers with at least fair credit scores; however, each lets you check to see if you’ll be approved with a soft credit check that won’t affect your credit score.

Company
Best for…
Rating (0-5)
Best marketplace
4.5
Best HELOC
4.9

Check out the reviews below for more details about each of these lenders.

LendingTree – Best marketplace

Large network of partner lenders

  • Apply for a home equity loan or HELOC from all LendingTree’s partners without hurting your credit
  • Certain partners may accept bad credit scores

LendingTree distinguishes itself in the home equity loan and HELOC market by offering a wide-ranging platform that connects borrowers with multiple lenders, ensuring that consumers find the best rates and terms to suit their needs.

This allows homeowners to compare different offers side by side, ensuring they make an informed decision. LendingTree’s user-friendly interface and comprehensive educational resources further enhance the experience, breaking down the complexities of home equity products.

The platform’s strength is in its ability to cater to a diverse range of borrower profiles, including those with varying credit scores and home equity levels. By providing access to a multitude of lenders, LendingTree ensures its users can secure the most competitive rates, making it an outstanding choice for those looking to leverage their home equity.


Figure – Best overall HELOC

Prequalify with no credit impact

  • 100% online application with funding in as few as 5 days
  • Requires initial minimum draw of 100% of credit line (minus fees)
  • Borrow up to $400,000 with the option to redraw

Figure revolutionized the HELOC experience by offering a 100% digital application process, quick approval, and funding in as little as five days. This efficiency is a game-changer for homeowners seeking quick access to funds.

Figure’s fixed-rate HELOC is attractive for those looking to lock in a rate, protecting themselves against future interest rate increases—a feature that provides financial predictability and security. Because Figure requires borrowers to take an initial draw of 100% of the credit line, it’s best for for individuals with immediate, significant financing needs, such as major home renovations or consolidating high-interest debt.

The simplicity of Figure’s product, combined with its innovative use of technology, positions it as a leading choice for homeowners who value efficiency and predictability in their financial planning.


Can you get a home equity loan with bad credit?

You are unlikely to get approved on your own for a home equity loan or line of credit with bad credit—often defined as a credit score of 579 or below. Most lenders have similar requirements for a home equity loan and HELOC.

Gauge showing the credit score ranges, with bad credit as a score of 300 - 579

Lenders start by evaluating would-be borrowers for risk: If they approve a loan against the equity in a borrower’s collateral property, how likely is that borrower to pay the debt back as agreed? 

Lenders have 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 620 for many lenders.
  • How much equity you have in the property, at least 15% to 20% equity is ideal
  • A good debt-to-income ratio is how much you owe compared to how much you make; many lenders won’t want this number to exceed 35% to 45%.

As we mentioned, a home equity loan is a second lien, so if you were to default on your loan, your primary mortgage lender would get the property first. If there’s not enough money recovered, your second lienholder might not get repaid. 

Home equity lenders may have stricter credit score requirements to lower their risk. While this doesn’t make it impossible to get a home equity loan with bad credit, it can make it more difficult. Your approval will hinge on how well you meet the lender’s other requirements. 

How to improve your chances of approval

If you’re a homeowner with bad credit and are hoping to take out a home equity loan, you can take several actions to improve your chances of approval. Regardless of your credit rating, it may be wise to focus on the following steps before applying for a home equity loan. 

Your credit score has a massive impact on your interest rate. This can affect the total cost of your loan and save money—or cost you more. 

Here are the best ways to improve your chances of loan approval if you have bad credit to ensure that your loan has the most competitive terms possible.

1. Work on improving your credit score

Some lenders will approve your application with a credit score as low as 620, but most 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, increase it as fast as possible. There’s no magic formula for this, but you can take the steps below to boost your score and qualify for a loan with a lower interest rate.

2. Check your credit report for errors

You can get a free credit report from each credit reporting agency. As you look over your report, make sure all the accounts listed are correct and check to see if any inquiries have been made in your name that you don’t recognize.

Accounts you didn’t open and inquiries you didn’t make could suggest identity theft. Also ensure any accounts you’ve paid off aren’t showing an outstanding balance.

3. Review credit card balances and revolving debt

Take a hard look at credit card balances and other revolving debt, and plan to pay off loans as fast as possible. Reducing your used credit to 30% of the credit available to you will improve your credit utilization ratio, which can raise your credit score.  

4. Reduce your debt-to-income ratio

Your debt-to-income ratio is the sum of all 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, increase your income or reduce your debt. You can take on side gigs to make extra money, cut back on dining out or media streaming services, or even sell things you no longer use.

By bringing in more money, you can not only increase your income but make extra debt payments to double your efforts. 

5. Build equity in your home

You need equity in your home to borrow against it.

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 faster and build more equity.

If your home was appraised several years ago, you get another appraisal. If the value comes back as $350,000, but the last appraisal was $300,000, you just gained $50,000 in equity. We only recommend this if home values have increased since your last appraisal. 

6. Consider a cosigner

A cosigner is an individual who also agrees to secure your new loan. This cosigner shares the obligation to repay your debt and can be held responsible if you default on the loan. 

Lenders will consider your cosigner’s credit history and income when you apply for your home equity loan. If they are creditworthy, adding them could be the key to getting your application approved. 


Tip

The loan balance and payment history are reported on your cosigner’s credit. If you make late payments or default, it affects their credit, and lenders will hold them responsible for any remaining debt.


How bad credit affects the cost of borrowing

Because 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 increase loan costs. For example, say you’re borrowing $10,000 for 10 years.  

Credit profileAPRMonthly paymentsTotal interest
Good6%$111$3,322
Bad12%$143$7,217

As you can see, high-interest loans will result in higher monthly payments and more interest paid than if you had good credit. Since home equity loan interest rates vary by lender, shop for the lowest interest rate.

How to apply for a home equity loan or HELOC with bad credit

If you’re a homeowner with bad credit and want to take out a home equity loan or HELOC, here are the steps you should take to apply. This process is similar to applying for other types of mortgages. 

Determine how much you can borrow

The amount you can borrow with a home equity loan or HELOC is limited to a portion of your equity in your home. To calculate this, determine your home value, then subtract your mortgage loan balance. 

If your home is worth $400,000, and you owe your lender $110,000, you have $290,000 in equity. This is your LTV, or loan-to-value ratio. But you can’t borrow the entirety of this equity; instead, lenders mitigate their risk by only allowing you to borrow against a certain percentage.

Combined loan-to-value (CLTV) is the ratio comparing all liens on your property against its market value. Each lender has its own CLTV limit, but 75% to 80% is common. You could borrow up to $210,000 against your property if your lender’s CLTV limit were 80%.

$400,000 x 0.80 = $320,000 CLTV limit – $110,000 current mortgage = $210,000

Gather information on your current mortgage

When applying for a home equity loan or line of credit, your potential lender will request details on your mortgage. Gather this documentation beforehand to streamline the process and move your application along faster.

This might include providing your most recent mortgage statement and a current payoff quote. 

Make your case with a letter 

Consider a proactive approach when applying for a home equity loan as a bad-credit borrower. This could mean drafting a letter for potential lenders beforehand explaining your situation.

For example, if you have bad credit due to a divorce or serious illness, explain that. You may also want to provide documentation that could serve as further explanation. This could include bankruptcy filing papers, divorce decrees, and more.

Shop around

Any time you’re looking for a new loan, it’s smart to shop around. This can help ensure that you have the best chance at approval and that you’re likely to snag the best possible rates and loan terms.

Shopping around with multiple lenders will give you options. You can then compare rates, fees, repayment terms, and loan limits to decide which offers the most attractive deal overall.

Move forward with your application

Once you’ve selected a lender, it’s time to apply. You’ll need to provide the lender with the necessary documentation and information so that they can adequately process your application.

This could mean providing copies of your recent pay stubs or W-2s, past tax returns, current mortgage statements, bank statements, copies of your identification, and more.

Repaying your home equity loan might improve your bad credit

A home equity loan may improve your credit score by diversifying the types of debt on your credit report. And you’ll rebuild your credit score with each on-time payment. 

This will help you get approved for other loans down the line, and you might get a lower interest rate.

Risks of getting a home equity loan with bad credit

The biggest risk is that home equity loans are secured by the value in your home. If you default on your loan’s repayment, you risk the foreclosure of your home. Not only will your credit be harmed further, but you could lose the roof over your head.

Home equity loans involve closing costs, which must be paid at the time of loan origination. You might be able to roll some of these costs into your new loan, but that increases your total cost. In contrast, personal loans and credit cards don’t charge closing costs, so a home equity loan can be more expensive upfront.

And of course, borrowers with bad credit tend to pay higher interest rates on their loans. You might pay more over the life of your loan than you would if you had a higher credit rating and score.

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.

Personal loan

You can get unsecured personal loans from various lenders, some of whom will lend to borrowers with poor credit. Each lender has its approval criteria, but you can compare requirements for bad-credit loans here to find an option that works for you.

Personal loans typically 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 you money on loan costs. 

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 have to worry about paying them monthly. If you have bad credit, this can be a more attractive option as your 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.