How to Get a Home Equity Loan with Bad Credit

Home equity loans allow you to borrow funds against the equity you've built in your home. You can use home equity to renovate or repair your home, consolidate debt, cover medical expenses or pay for college. If you need additional resources, a home equity loan can give you access to necessary cash. If you've got bad credit, securing a home equity line of credit with favorable terms can be more challenging. 

What Are Home Equity Loans?

A home equity loan allows borrowers to use the equity in their home as collateral. The value of the property determines the loan amount for a home equity loan. An appraiser from the lending institution will determine the property's current market value. 

When you're approved for a home equity loan, the lender will pay out a single lump sum. That means if you're approved for a $40,000 home equity loan, you'll receive a deposit of $40,000. 

To repay the loan, you'll start repayment right away with a fixed interest rate. You'll pay a set amount every month for the term of the loan, which can range from five years or 30 years

Can You Get a Home Equity Loan with Bad Credit?

It’s possible to get a home equity loan with bad credit. What's bad credit? Your credit score, most commonly a FICO score, ranges from 300 to 850. Lender criteria vary, but usually, a score above 670 is “good,” whereas other lenders will look for a credit score above 700 or above 740 for a "very good" score. 

Some lenders will consider any credit score from 580 to 669 in the "fair" range. Lenders consider a score of 300 to 579, in the "poor" range, as a bad credit score. 

How to Qualify for a Home Equity Loan with Bad Credit 

When evaluating borrowers for a home equity loan, lenders look at credit score, equity in the home and debt-to-income ratio, as well as the loan-to-value (LTV) ratio for the home. 

Usually, lenders look for 15% to 20% of equity in your home, an LTV ratio of 85% or lower and a credit score of 620 or higher. You usually need a debt-to-income ratio of 43% or less. 

Could you qualify with a lower credit score or more debt? Yes. Criteria vary by lender. However, with a higher credit score, more favorable loan terms are usually available. 

Advantages of Getting a Bad Credit Home Equity Loan

There can be advantages to getting a home equity loan with bad credit. Here's why it can be a good financial solution. 

Access to Funds

If you have a bad credit score, securing funding can be challenging. You might only have access to loans with high interest rates. Home equity loan interest rates may be lower than other available loans for borrowers with bad credit. 

Getting a home equity loan with bad credit allows access to funds that can be used for various purposes, such as consolidating debt, making home improvements, covering unexpected expenses and removing additional financial burdens.

Lower Interest Rates

Home equity loans typically come with lower interest rates than other types of loans, even for individuals with bad credit. This means you'll spend less on interest over the lifetime of the loan, making it easier to pay back the loan and build your credit score over time. 

Potential Tax Benefits

In some cases, the interest paid on a home equity loan can be tax-deductible, providing potential tax benefits to borrowers. This benefit can help you save more while taking control of your finances. 

Disadvantages of Getting a Bad Credit Home Equity Loan

There are some disadvantages to getting a home equity loan with bad credit. Here's what you'll want to consider before pursuing this option. 

Increased Risk of Foreclosure

If a borrower with bad credit cannot make timely payments on a home equity loan, there is a risk of foreclosure. This can result in the loss of the borrower's home. For this reason, it's essential not to over-leverage available funding and risk being unable to pay the loan on time. 

Limited Borrowing Capacity

Lenders may be more cautious and offer lower loan amounts, limiting the borrower's access to funds. Even if you have significant equity in the home, with bad credit, the lender may limit how much you can borrow. If you need more significant funding, you may need to consider other funding options. 

Higher Fees and Closing Costs

Lenders may impose higher fees and closing costs for borrowers with bad credit, further increasing the overall cost of the loan. Unless it's an emergency, it might be a better idea to focus on building your credit score before applying for a home equity loan to save more long-term. 

How to Get a Home Equity Loan with Bad Credit

If you're ready to get a home equity loan with bad credit, here are the steps. 

1. Improve Your Credit Score

Work on improving your credit score by paying off outstanding debts, reducing credit card balances and consistently making on-time payments. To start, you're entitled to a free annual credit report from all three credit bureaus: Experian, TransUnion and Equifax. Check your credit reports for inaccuracies and report incorrect information to the credit bureau showing the inaccuracies.  

Then, focus on paying off debt and set up automatic payments for the minimum due on all debts to avoid accidentally missing a payment. Other steps you can take to increase your credit score quickly are:

• Become an authorized user: Ask a friend or family member with a high credit score to add you as an authorized user on a credit card. This step can boost your credit score.
• Rent reporting: Use a rent reporting company to report on-time utility payments. If you have a rental contract, they can also report on-time rental payments. 

2. Shop Around for Lenders

You can shop around for lenders and compare the best available rates. You can also negotiate with lenders to secure the best available terms. Look for lenders specializing in bad credit home equity loans and compare interest rates, terms and fees. 

3. Build Equity in Your Home

Increase your chances of approval by increasing your home's equity through regular mortgage payments or home improvements. By building equity in your home, you'll also increase the maximum potential loan amount. 

4. Get a Co-Signer

Find a co-signer with good credit willing to take joint responsibility for the loan. This could be a friend or family member. Remember that the co-signer will be responsible for loan payments if you fail to pay. To avoid straining the relationship, make all payments on time. 

5. Consider a Secured Loan

Offer collateral, such as another property or a valuable asset, to secure the loan and minimize the risk for the lender. If you own more than one home or other real estate like farmland or parking spaces, this could serve as collateral. 

6. Provide Additional Documentation

Prepare to provide additional documentation that demonstrates your financial capacity to repay the loan, such as proof of income, assets and employment stability. You could use savings accounts, retirement accounts, employment history and other documentation demonstrating your financial stability to the lender. 

Get a Home Equity Loan with Benzinga's Top Mortgage Brokers

Find some of the best home equity loans available today with Benzinga's top mortgage brokers. 

Getting a Home Equity Loan with Bad Credit

You can get a home equity loan with bad credit, even if you have to pay higher interest or fees. For consumers with financial pressure, a home equity loan can offer much-needed cash to improve financial liquidity. However, if you have time, working first to raise your credit score and build additional equity in the home can help you get a loan with lower interest and more favorable terms. Need additional help? Find the best mortgage lenders for bankruptcies here.  

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