One of the most significant economic stories of 2022 has been high inflation. Everything from fuel to food to utilities has gotten more expensive over the past year. Making matters worse is that wage growth hasn’t kept pace leaving many in a pinch and unable to afford things they could a year ago. So, homeowners are turning to their homes to cash out on some equity.
CoreLogic analysis shows U.S. homeowners with mortgages, roughly 63% of all properties according to the 2020 American Community Survey, have seen their equity increase by over $3.6 trillion since the second quarter of 2021, a gain of 27.8% year over year.
Your Credit Score Matters, But Not as Much as With a Traditional Mortgage
Your credit score will be one of the significant factors determining whether you qualify for a home equity loan. The lower your credit score, the greater the likelihood you’ll be charged a higher interest rate.
Experian says that a minimum FICO score of at least 680 is usually required to qualify for home equity loans. FICO scores range from 300 (poor credit) to 850 (excellent credit).
However, if your credit score falls below this benchmark, don’t despair. You still have some home equity loan options, particularly if you meet the following qualifications.
What You Need 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.
Borrowers will need the following:
- 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?
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.
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 in as little as four days but an average of 18. 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
- 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.
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
- 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)
- 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 n o upfront costs
A mortgage broker also might be able to help. They usually have access to the interest rates and credit requirements for each lender.
There are Two 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.
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.
- 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.
- 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
READ MORE: Advantages and disadvantages of home equity loans
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.
READ MORE: Simple ways to build equity
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.
READ MORE: Home equity loan requirements
Other Loan Options
- Personal loan: The interest rates on these 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.
- Cash-out refinances: This refinances your current mortgage, so you end up with only one monthly payment, but you’ll have to pay closing costs.
- 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.
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.