-
Commitment to our readers
18 years
Helping you save money
Reviewed
by experts
Cited by
major publications
Finder maintains full editorial independence to ensure for our readers a fair assessment of the products, brands, and services we write about. That independence helps us maintain our reader's trust, which is what keeps you coming back to our site. We uphold a rigorous editorial process that ensures what we write and publish is fair, accurate, and trustworthy — and not influenced by how we make money.
We're committed to empowering our readers to make sound and often unfamiliar financial decisions.
We break down and digest information information about a topic, product, brand or service to help our readers find what they're looking for — whether that's saving money, getting better rewards or simply learning something new — and cover any questions you might not have even thought of yet. We do this by leading with empathy, leaning on plain and conversational language that speaks directly, without speaking down.
How to qualify for a home equity loan with bad credit
A home equity loan is a second mortgage, so requirements can be more rigid than for a traditional mortgage.
Requirements you may need to get a home equity loan with bad credit include:
- At least 15% equity in your home. Most lenders won’t approve a loan if a borrower has less than 15% or 20% equity in their home. This is to protect the lender if you default on the loan. Having more than 15% equity can increase your chances of approval with bad credit.
- Low debt-to-income ratio. Some lenders will accept a debt-to-income ratio of less than 43%, but most want a ratio of 36% or lower. But if you’re trying to get a home equity loan with bad credit, your debt-to-income ratio may need to be even lower. Lenders see a DTI of 15% as ideal.
- Demonstrated ability to repay. Lenders will verify that you have enough resources to cover your home equity loan. This can include documentation of employment, income and assets. At least two years at a steady job with a competitive salary could help you get approved for a home equity loan.
What is the minimum credit score for a home equity loan?
Your score needs to be at least 620 to qualify for most loans, though credit score requirements vary by lender. Community banks and credit unions often have more flexible credit policies than big banks and may be more willing to overlook bad credit if the rest of your application is stellar.
7 steps to get a home equity loan with bad credit
Following these seven steps can help borrowers with bad credit improve their chances of getting approved for a home equity loan.
Step 1. Know how much equity you have in your home
Your equity is the portion of your home’s value that you own outright or have paid off through your mortgage. You can calculate your home equity by subtracting your outstanding mortgage balance from the appraised value of your home.
For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity.
Step 2. Calculate your debt-to-income ratio
Your debt-to-income ratio — or DTI — is one of the most important factors lenders look at when considering a loan. A score of 36% or lower gives you the best chance, but some lenders will accept 43% or higher.
To calculate your DTI, add up all of your monthly debts. Include your housing payment, car payments, student loans, personal loans, medical expenses, credit card payments, child support, alimony and any other regular payments.
Next, divide that number by your gross monthly income. The resulting number is your DTI.
Step 3. Work on improving your credit score
Take action to improve your chances of approval with bad credit. This includes paying down debt, disputing errors on your credit report and building up a positive payment history.
Step 4. Prepare to explain your situation
Many lenders accept letters of explanation if you have bad credit. Writing one could show why your credit score is low, what you’re doing to improve it and how it won’t happen again.
An explanation letter could be a smart move if you’re recovering from bankruptcy or divorce or have a long period of unemployment.
Step 5: Compare rates and terms
When you’re comparing lenders, make sure to compare rates and terms to find the best deal on a home equity loan. But remember that the rate you pay will be higher than the advertised rates on lender websites: Those sample rates are created using a fake profile with excellent credit.
Because of this, you may have to shop around more than someone with good credit, but the payoff could be worth it. Note any fees or closing costs you may have to pay, in addition to the interest rate. This will help you compare loans apples to apples.
Step 6: Consider a co-signer
If you’re having trouble qualifying for a home equity loan on your own, you may want to consider applying with a cosigner. This can be a family member or friend with good credit who’s willing to sign the loan with you. Having a cosigner may help you qualify for a loan with better terms.
Step 7: Apply for the loan
Once you’ve found the best home equity loan for your needs, apply for the loan. This process is the same as when you applied for your primary mortgage. It involves submitting additional information about your finances and credit history, as well as paying any closing costs and fees.
Is it easier to get a HELOC with bad credit?
No, the process to get a home equity line of credit, or HELOC, is similar to a home equity loan, as are the requirements to qualify. But there are some differences to keep in mind.
Because a HELOC has a variable interest rate, it often has a lower starting rate than what you can find for a home equity loan. But as market rates fluctuate, so will your HELOC rate. And because your payments during the credit line’s draw period are interest-only, rate changes affect what you pay monthly.
And while the interest-only payments of a HELOC are lower than those you’d make for a home equity loan, once a HELOC’s draw period ends, your payments will increase to include any principle you haven’t yet paid off.
Is a home equity loan the right choice?
A home equity loan might be the best financing option if you:
- Need to consolidate high-interest debt.
- Need to make major home repairs or improvements.
- Have a large one-time expense, such as a medical bill or tuition payments.
- Have at least 15% equity in your home, a steady income and low debt.
- Can comfortably afford the monthly payment.
You may want to avoid a home equity loan if the new monthly payment would add stress to your finances. This is because a home equity loan uses your home as collateral, so missing payments could result in foreclosure.
Compare interest rates for home equity loans, HELOCs and cash-out refinancing
Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan, HELOC or Cash-Out Refinance.
If you selected a home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.
In the Cash-Out Refinance tab, select Refinance and enter your ZIP code, credit score and other property details to see what you might qualify for.
Alternatives to home equity loans for bad credit
If a home equity loan isn’t right for you, there are a few more ways to gain access to the money you need.
Cash-out refinance
A cash-out refinance is where you refinance your mortgage for more than the balance you currently owe and keep the difference in cash.
For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you could do a cash-out refinance for $200,000. This would give you $50,000 in cash to use for whatever you want.
A cash-out refinance may be easier to qualify for than a home equity loan or HELOC, but it may be more expensive than a home equity loan due to higher closing costs.
Personal loans
The application process for a personal loan is generally more difficult than for a home equity loan because there’s no collateral. Your interest rate may also be higher.
Still, personal loans could be a good option if you don’t have equity in your home or if you don’t want to put your home at risk.
If you’re considering a personal loan, compare top personal loans for bad credit.
Reverse mortgages
A reverse mortgage is a type of loan available to people over 62. Unlike a traditional mortgage, you don’t have to make monthly payments. Instead, the loan is repaid when you sell your home or pass away.
This makes reverse mortgages a popular choice for seniors who want to tap into their home equity without having to make monthly payments. But be aware of the risks — you won’t be able to leave your home to your heirs and you’ll have to repay the loan when you die or sell your home.
Bottom line
If you’re considering a home equity loan, be sure to compare rates and terms from multiple lenders to find the best deal. And if you have bad credit, you may want to consider a cosigner or look for a lender that specializes in bad credit home equity loans.
Ask a question
More guides on Finder
-
Accessing home equity when interest rates are high
Weighing your options is vital to avoid ending up in worse financial shape than you were before you tapped into your home equity. Here’s how.
-
How to use your home equity to fund a home improvement
Determine the best way to access your home’s equity for renovations.
-
Texas home equity loans and HELOCs
There are special laws you need to know if you plan on getting a HELOC or home equity loan in Texas.
-
Florida home equity loans and HELOCs
What to know about HELOC rates in Florida to get the best rate.
-
Truist HELOC review
What to know about a Truist HELOC — before you apply.
-
How much are closing costs on a HELOC or home equity loan?
Do you have to pay closing costs on home equity loans and HELOCs?
-
How to get preapproved for a home equity loan
Here are questions you should prepare for when getting preapproved for a home equity loan.
-
Best home equity loans of 2024
Our list of this year’s best home equity loan lenders. These lenders cater to particular types of borrowers, from military members to those with fair credit.
-
Best HELOC lenders of 2024
Together, these 7 HELOC lenders cater to a diverse range of borrowers.
-
Figure HELOC review
Get approved in minutes and funded in days with no hidden fees.