If you have a bad credit score, it may seem like you won’t be able to qualify for a loan. But if you’re a homeowner who has built up some equity, a home equity loan can be a low-cost way to borrow money, particularly if you need to consolidate other debts.
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Key Points
- Home equity loans and lines of credit turn your home’s equity into money you can loan yourself.
- Home equity loans are secured loans that use your home’s equity as collateral, so you could lose your home if you can’t repay the loan.
- Most lenders will require a minimum credit score of 620, but you may qualify with a lower score if you meet other requirements.
- You must have repaid about 20% of your home’s market value to be eligible.
- You will need to have established a record of making on-time payments.
- If a home equity loan doesn’t work for you, you may be able to qualify for a cash-out refinance.
Your Credit Score Matters, But Not as Much as With a Traditional Mortgage
Since you already own your home, your credit score will matter when applying for a home equity loan, but it won’t matter as much as when you apply for a traditional mortgage. If you have a lower score, you’ll likely still qualify for a home equity loan. However, you’ll pay a higher interest rate.
According to Experian, the minimum FICO score to qualify for a home equity loan is 680. That’s actually in the “good credit score” range. However, many lenders target borrowers with poor credit (or FICO scores between 300 and 579.)
Mortgage Lenders That Work With Bad Credit Borrowers
These are some of the top lenders who work to provide home equity loans for borrowers with bad credit.
Best for Borrowing More: Spring EQ Home Equity Loans
- Minimum credit score requirement: 620 for home equity loans (700 or higher for 95% loans); 680 for home equity loan lines of credit (HELOCs)
- Loan assistance programs: Not provided
- Spring EQ offers fixed-rate loans. The lender may allow you to access up to 97.5% of your home’s value when most others stick to 85%, and your loan amount could be as high as $500,000
- Noteworthy information: Spring EQ operates in 41 states and funds your loan as quickly as four days after approval but averages 18 days. There is no in-home appraisal requirement for loans less than $175,000 and only requires a “drive-by” exterior appraisal. They offer loans from $25,000 up to $500,000
Best if You Have an FHA Loan: Rocket Mortgage
- Minimum credit score requirement: 620
- Loan assistance programs: They don’t offer any down payment assistance programs, but they accept them from other institutions on your behalf. Rocket Mortgage only takes specific types of down payment assistance. Grants: Gifted funds that usually don’t have to be repaid.
- Rocket Mortgage offers both fixed-rate and variable-rate loans. The borrower’s debt-to-income ratio must be no more than 50%.
- Noteworthy information: For FHA loans, you might get approved with a 580-credit score and a higher debt-to-income ratio.
Best if You’re Already a BoA Customer: Bank of America Home Equity Loan
- Minimum credit score requirement: Bank of America does not disclose a minimum credit score requirement, but based on historical data, borrowers will likely need a credit score in the mid-600 range
- Loan assistance programs: None
- Loans have variable interest rates
- Your credit limit is up to 85% of your home value minus the amount you owe
- Noteworthy information: No application fee, no closing costs, and you can access your funds quickly via online banking, by phone, at a Bank of America location, or through a check mailed to you. The institution’s limited offerings do not include standard home equity loans. Home equity lines of credit are the only choice for borrowers who want to borrow against their homes
Best for No Fees: Discover
- Minimum credit score requirement: 620 (700 or higher for $150,000 or more)
- Loan assistance programs: None are disclosed
- Discover’s Financial Education Center provides information for financial resources assistance
- Discover offers home equity loans with a fixed APR that ranges from 3.99% up to 11.99%
- This lender’s maximum loan-to-value rate is 90%
- Noteworthy information: No fees, high loan-to-value ratio, no HELOC option, high minimum loan amount ($35,000 to $300,000)
Best for Speed: Guaranteed Rate
- Minimum credit score: 620
- Loan assistance programs: None provided
- Guaranteed Rate’s HELOCs have a fixed interest rate that could be as low as 5.54% APR
- This lender offers home equity lines of credit ranging from $20,000 to $400,000 (There is a minimum of $25,001 in Alaska). The draw period ranges from 2-5 years.
- Noteworthy information: The application is digital and funds can be available in minutes. There are no upfront costs
Pro tip: A mortgage broker also might be able to help. They usually have access to each lender’s interest rates and credit requirements.
How to Qualify for a Home Equity Loan with Bad Credit
Some lenders will be willing to provide home equity loans to homeowners with a credit score as low as 620, but it can be tough to track down these offers. There are even lenders who cater specifically to borrowers with poor credit scores.
Qualifications include:
- You need 15% to 20% equity in your home.
- A maximum debt-to-income ratio (DTI) of 43%
- A record of making on-time monthly payments
- Stable employment and income history
Some lenders may be willing to provide home equity loans to homeowners with a credit score as low as 620, but finding these offers can be incredibly challenging. Discover may work with applicants who have credit scores in this range.
You want to avoid falling below the 20% equity in your home, so you don’t have to pay private mortgage insurance.
And if you plan on lumping in the closing costs into your new loan, you will want to do the math in terms of how much equity you can take and if it makes financial sense. You will need to calculate your break-even point, including how long you plan to stay in the home.
READ MORE: Is a home equity loan a good idea?
There are Three Types of Home Equity Loans
- Second mortgage: A second mortgage is simply a loan secured by the equity you have in your home. It is typically a fixed-rate, lump sum payment to the borrower that is repaid in installments.
- Home equity line of credit (HELOC): A HELOC is a home equity loan or line of credit secured by the home that allows you to draw funds as you need. It functions much like a credit card. You repay the money at an adjustable rate, with a typical draw period of ten years with a credit limit.
- Cash-out refinancing: This requires applying for a completely new mortgage. You’ll have one monthly payment, but your mortgage repayment clock will reset back to 30 years.
At a Glance: Comparing the Types of Loans
If you aren’t sure what type of home equity you need, here’s a brief comparison to help you figure out which one you need:
| Cash-out refinance | Home equity loan | Home equity line of credit (HELOC) | |
| What’s the difference | Pays out some of your home’s existing equity in cash, resulting in a new mortgage | The loan is based on your home equity; it is in addition to your current mortgage | Revolving line of credit based on your home’s equity. You don’t need to use all of it at once. Instead, you have a “draw period,” usually ten years |
| Interest rate | Can be fixed or adjustable rate | Can be fixed or adjustable rate | Variable rate |
| How much can you borrow? | 80% of your home’s market value unless you have a VA loan, in which case you can borrow up to 90% | 80-85% of your home’s market value minus what you owe on your mortgage | 75% of total loan-to-value (LTV) is standard. |
| Main pro | Rolls all of your debts into one loan | Allows you to borrow money at lower interest rates than most personal loans charge | Flexibility |
| Main con | Closing costs can be more than $5,000 | You could end up owing more than your home is worth if home values fall | There may be minimum withdrawal requirements |
| Credit score requirement | 640 to qualify for the best loans | 620, though you may be able to qualify with a score as low as 500, you’ll pay higher interest rates | 620 |
| Repayment | One monthly mortgage payment | Two monthly payments (mortgage and the loan) | Two payments only when you’re making payments to the HELOC |
| Documents required | Property appraisal, W2s, tax returns, pay stubs, proof of homeowner’s insurance, asset statements, documentation of any outstanding debts you owe, driver’s license or government ID, cashier’s check for the balance of the mortgage | Property appraisal, proof of income, Social Security number, documentation of any outstanding debts you owe, mortgage statement, property tax bill, proof of homeowner’s insurance | Pay stubs, bank statements, proof of income, proof of homeowner’s insurance, mortgage statement, property tax bill |
| Best for: | People planning to remain in their current home for a long period and who need a large sum of cash | People with lower credit scores and those who want to avoid the high closing costs of a new mortgage | People who don’t need a large amount of money now but need the flexibility to borrow a larger amount in the future |
Pro tip: For all three options, you’ll need to know your home’s value and documents showing your household income, Social Security number, and any other outstanding balances. Lenders also will ask for a mortgage statement, a property tax bill, and a copy of your homeowner’s insurance policy.
Learn more about the differences between second mortgages, home equity lines of credit and cash-out refinances by watching this video:
Advantages and Disadvantages of Home Equity Loans
As with anything in life, home equity loans have some pros and cons.
Pros
- The interest could be tax deductible if loan proceeds are used for home improvements.
- They have a lower interest rate than many personal loans
- They have fixed interest rates
- You may qualify for a larger loan than what you’d qualify for elsewhere.
Cons
- You could end up at risk of foreclosure
- Bad credit means you’ll pay higher interest rates
- Mortgage rates are unusually high right now
- You’ll be making two mortgage payments
- The loan amount depends on how much equity you’ve built
- These will have some upfront costs, including a home appraisal and origination fees
How to Apply
Home equity loans are still available even if you don’t have good or excellent credit. Here’s what you need to do before you apply for a home equity loan.
1. Check Your Credit Report and Credit Score
Review your credit history carefully. Fix any errors — particularly regarding payment history — that could impact your FICO score. Pull free credit reports from all three credit bureaus at AnnualCreditReport.com.
READ MORE: How to fix errors and check your credit score for free
2. Evaluate Your Debt-to-Income Ratio
To calculate your DTI, total your monthly debt obligations, including credit card debt, personal loans, mortgage payments, and other debt payments. Divide this total by your gross monthly income. It should be at least 43%
3. Calculate the Amount of Equity You Have Built Up
The loan-to-value ratio determines how much equity you have built up. To calculate your LTV, divide your remaining loan balance by the current appraised value of your home.
4. Consider How Much You Need to Borrow
Many lenders will allow you to borrow up to 80% of your home’s value minus your existing mortgage balance.
READ MORE: Truth in Lending disclosures
5. Make Sure You Can Afford Your Loan Payments
You don’t want to set yourself up for failure.
6. Compare Interest Rates
It’s crucial to compare rates, which vary widely from lender to lender. The lower your credit score, the higher your interest rate will be. Borrowers with good credit will qualify for the lowest rates.
7. Choose a Lender
Rates will vary by lender, and some lenders will have less stringent credit score criteria than others. Do some research to figure out which lenders are more likely to work with borrowers who have a lower credit score.
8. Wait for Loan Approval
The entire application process could take anywhere from two weeks to two months, because the lender will need time to complete and view the home appraisal and complete the underwriting process. In the meantime, don’t apply for any other new credit, and be sure to keep paying your bills on time. Anything that reflects negatively on your credit report will be reported to the lender.
Other Loan Options
- Personal loan: The interest rates will likely be higher, but the loan terms are usually shorter. This means higher payments each month, but you could end up paying less in interest.
- Reverse mortgage: With these, the amount the lender owes the homeowner increases over time due to interest and fees added to the loan balance every month.
Other options include taking out a secured loan or asking a co-signer for help.
READ MORE: How to get a loan with bad credit
The Bottom Line
As with any loan, borrowers must consider the pros and cons. Financial management is a skill you must learn if you’re considering taking on the responsibility of taking out a loan. It’s a responsibility that requires a thorough plan and the discipline to give back what you owe. Not paying the lender back can cost your credit score to drop, and you won’t be able to make loans in the future anymore.
FAQs
There are two ways to know your property’s market value. One is to order an appraisal from an official state-licensed property appraiser. The second is to contact a real estate professional for a broker price opinion or BPO. The latter is free but doesn’t hold as much weight as an appraisal report completed by an official state-licensed appraiser.
Aside from being a unique identifying number, NMLS stands for Nationwide Mortgage Licensing System. This designation means a licensed mortgage loan officer has completed professional certifications that enable them to stay in regulatory compliance. The NMLS is a centralized database that maintains licensing information and allows consumers to check information on loan officers they work with.
Most people don’t qualify for a personal loan, and bad credit is the most common reason they don’t qualify. But it doesn’t stop anyone from getting a loan, especially if you are a homeowner with considerable equity built up in your home.
While nothing is guaranteed, you will have a better shot at approval since you will be offering up your home as collateral for a secured loan. This gives most lenders more peace of mind when weighing whether to lend to you, and they know if you default, their money is secure and they can take your home.
Home equity loans are often called “second mortgages” because you’re left with two mortgage payments, one for your primary mortgage and one for your loan. These can be better borrowing choices than personal loans because the interest rate is currently around 7%, compared to a personal loan with APRs as high as 30%.
Second mortgages are secured loans that are in addition to your primary mortgage. There are a few types of second mortgages. But the term “second mortgage” can mean three things.