Updated September 27, 2024
If you have bad credit, you know that it’s not as easy to access financing when you need it. Whether you need to borrow money to pay off medical debts, make improvements to your home, or anything else, it can be hard to get started if you have bad credit. But just because it’s hard to get started doesn’t mean it’s impossible.
You can get a home equity loan with bad credit, but due to the additional risk that lenders take on in that instance, the requirements and costs might shape up differently. Here, we’ll take a look at how to get a home equity loan with bad credit, what you can expect from your home equity loan if you have bad credit, alternatives that don’t care about your bad credit, and more. Let’s get right to it!
Can You Get A Home Equity Loan With Bad Credit?
It depends. The vast majority of lenders will require a minimum credit score of 620, which is solidly in the middle of the FICO model’s range for ‘fair.’ If you’re applying for a home equity loan at a credit union or smaller local bank, they may be more willing to work with you below that threshold if you meet other criteria like having a higher income. However, in most cases, you’ll need a minimum credit score of 620 is the lowest you can go, and each institution may have their own criteria.
Eligibility Factors
As we just mentioned, a ‘fair’ FICO score of about 620 is typically the lowest most lenders will go, but there are a few other factors that may influence your eligibility. Some of those factors include:
- The amount you’re asking to borrow: Assuming the home value and the amount of equity available are the same, there’s a big difference between someone looking to take out $100,000 in equity compared to someone taking out $20,000 in equity.
- Where you’re applying: If you have a history with the financial institution you’re applying at, they may be more equipped to judge your overall financial picture when assessing your eligibility. As a result, they could be more lenient with your credit score.
- Your Income: Getting a home equity loan with bad credit is more complicated if you don’t have a stable income and regular employment. It’s not impossible to get a home equity loan if you’re self-employed or don’t have a ‘typical’ source of income, but you’ll probably have a more difficult time finding a willing lender, especially if you have low credit.
- Your Payment History: Traditional lending institutions need to see proof that you’re willing and able to pay your bills on time before they agree to lend money to you. If you have bad credit, your payment history will be a big factor in whether you’re approved for a home equity loan.
How to Get a Home Equity Loan With Bad Credit
Here’s a step-by-step guide to getting a home equity loan with bad credit.
1. Think About Your Timeline
First, when do you need the cash? Is your need for something urgent like medical treatment, or something you’re planning for, like tuition? Keep in mind that it can take anywhere from two weeks to two months to get a home equity loan, so plan accordingly.
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2. Check Your Credit Score and Report
As we mentioned earlier, you typically need a credit score of at least 620 to qualify for a home equity loan. Smaller lenders where you have an existing relationship may be willing to work with you, but 620 is widely accepted as the minimum.
If your score is in the ‘good’ range according to the FICO scale (meaning your score is between 670 and 739), you may be okay to apply straight away. However, if your credit score is below 620 but in the ‘fair’ range (above 570), you should consider taking steps to improve your score before applying.
Additionally, you should take the time to check your own credit report. It’s rare for their to be inaccurate information on your credit report, but if there’s anything out of the ordinary—like having the wrong address, names associated with you, or accounts you don’t own—reporting it right away. Having those errors corrected could potentially lead to an increase in your credit score.
3. Calculate Your Home Equity
Before you apply, double check the amount of equity you have in your home, as this will limit how much you could borrow. Most institutions will require that you keep at least 20% equity and are only willing to lend a maximum of 80% of your loan-to-value (LTV) ratio. That means if your home is worth $200,000, and you have $100,000 in equity, you’d be able to borrow a maximum of $48,000. Here’s the math on that:
- You must retain 20% equity: $200,000 x 0.20 = $40,000
- You have $100,000 in equity, but you can’t borrow it all because you must retain 20%: $100,000-$40,000 = $60,000
- You can take out a maximum of 80% of your loan-to-value ratio: $60,000 x 0.80 = $48,000
4. Check Your Eligibility Before Applying
Beyond your credit score, most lenders have a set of criteria that they judge applicants against. Take the time to make sure you meet those requirements before applying. While it can vary from lender to lender, common requirements are:
- Having 15-20% equity in your home
- Having a debt-to-income ratio of 40% or less
- A steady job and income
5. Lower Your Debt-to-Income Ratio (DTI)
While your DTI doesn’t directly impact your credit score, it can influence your eligibility for a home equity loan. Fortunately, you can take two concrete steps to reduce it. Obviously, paying off debt will help, but you can also increase your income. Picking up a side-hustle to bring in a little extra cash each month can make lenders more comfortable if you have less-than-perfect credit.
Check Your Debt-to-Income Ratio With Our Simple Calculator
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6. Improve Your Credit Score
Improving your credit score typically takes time. To make significant improvements, you’ll need at least a year and usually more time than that. However, if you have a poor or fair credit score, you can often take a few actions that lead to relatively rapid improvements. Consider actions like:
- Reducing Your Debt: We get it; it’s easier said than done. In fact, you may be trying to access your home equity to pay off your other debts. However, if you have the cash, reducing your debt can lead to rapid improvements in your credit score.
- Focus on Making Timely Payments: Your payment history is the most important factor influencing your credit score, so focus on making all your payment obligations on time. If you can make each payment in full, all the better, but make timely payments your number-one priority for improving your credit score.
Alternatives to Home Equity Loans
When you need to access your home’s equity with bad credit, you have options even if you don’t qualify for a home equity loan. Let’s take a closer look at some of the most common ways to access your home’s equity with bad credit.
Home Equity Line of Credit (HELOC)
A HELOC works like a credit card, allowing you to borrow up to a certain limit based on your home’s equity. You can borrow as needed during a draw period and repay only the amount you use. They may not be the best choice if you have bad credit though. HELOCs tend to have higher interest rates, which are typically variable. That means it will cost you more over time, and your interest rate could increase, significantly changing your monthly payment.
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Check out our guide on how to get a HELOC with bad credit!
Cash-Out Refinance
With a cash-out refinance, you replace your existing mortgage with a new one, borrowing more than you owe and receiving the difference in cash. If your credit is poor, the interest rates may be higher, but you can still access your home’s equity this way.
Compare Your Options
Home equity loan vs cash out refinance — which is better for you?
Private Home Equity Loans
Finally, some private lenders guarantee home equity loans for bad credit. While these loans may be more accessible, they’re often less affordable because they come with abnormally high interest rates and less favorable terms compared to traditional banks or credit unions. This can end up leaving you in an even worse place than you started, and if you default on the loan you could lose your home.
Key Takeaway
Each option will offer different terms, interest rates, and eligibility requirements. The more accessible the option is for consumers with bad credit, the more expensive it will be in the long run. So, make sure to balance your current needs with your expectations for the future to avoid getting into an unsustainable agreement.
What If You Don’t Qualify For a Home Equity Loan?
We get how frustrating the catch-22 of bad credit home equity loans can be.
You have poor credit and high-interest debt, so you want to use your home equity to pay it off. But you can’t access your home equity because you have poor credit. To access your home equity, you’d need to pay off some of your debt to improve your credit score—which is what you’re trying to do in the first place.
It can be maddening. SKYDAN makes it easier.
With SKYDAN’s residential sale-leaseback program, you can access your home equity no matter what your credit score is. Why? Because we’re not a bank or lender; we’re a real estate investment company. That means we don’t care about:
- Your credit score
- Your income
- Your debt
All that matters to us is that you have equity in your home. Here’s how our program works:
- SKYDAN buys your home, but you don’t move out.
- You then agree to lease your home back from us. We set a mutually-agreed upon amount, not exceeding 2 years.
- Rent is deferred until the end of the agreement, so no monthly payment is due.
- Finally, at the end of the agreement, you have two options, so you’re never stuck.
- Purchase your home back at SKYDAN’s original purchase price plus deferred rent.
- You sell your home at its current market value and receiving all additional equity.
With SKYDAN, you could have cash-in-hand within 30 days of qualifying. Get started in less than three minutes to see if you qualify!
FAQs About Bad Credit Home Equity Loans
Can You Get a Home Equity Loan With a 580 Credit Score?
If you have a credit score of 580, it will be significantly harder to get a home equity loan. However, it’s still not impossible. The factors we mentioned above, like your payment history and DTI, can vary from lender-to-lender.
For example, if you have a credit score of 580, or anywhere else below 620, you could potentilly get approved if you have stable employment, a lower DTI, or lots of equity in your home. In short, if your credit score is weak, your other financial factors need to be stronger to make up for it.
What Are the Risks of a Bad-Credit Home Equity Loan?
It’s possible to get a home equity loan with bad credit, but does that mean you should? Let’s take a look at some of the risks that you could face after getting a bad-credit home equity loan:
- High Interest Rates: Having bad credit will impact the interest rates you can access. This means that over time, you’ll end up paying the lender back much more than you initially borrowed. Unless the rest of your finances are in exceptional condition, the best interest rates will be hard to qualify for with a credit score below 700.
- Expensive Closing Costs: Closing costs for a home equity loan can be anywhere from 2-5% of the total loan value. When you consider how much a home equity loan will actually cost you, it’s essential to factor that cost in so you don’t burden yourself right off the bat.
- Further Damaging Your Credit: If you have bad credit, taking on more debt typically is not a great way to change your circumstances. Before you take out a home equity loan, consider how your debts could make it even harder to secure financing in the future.
- Potential to Lose Your Home: Your home equity loan will be secured against your home. If you start falling behind on payments, you could risk losing your home to foreclosure. Therefore, it’s essential to only take out what you can pay back and to never use a home equity loan for short-term financial relief.