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!
How do I Qualify for a Bad-Credit Home Equity Loan?
- A Credit Score of 620 or Higher: The vast majority of lenders will require a minimum credit score of 620. If you’re applying for a home equity loan at a credit union or small bank, they may be more willing to work with you below that threshold, but for the most part, 620 is the lowest you can go.
Is your credit score lower than 620? Check out the alternative that doesn’t require a credit score
- A Stable 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.
- Payment History: Traditional lending institutions need to see historical 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.
- Equity in Your Home: Naturally, to get a home equity loan, it’s essential that you have equity built up in your home. Most lenders will require that you have 20% equity in your home, or a loan-to-value (LTV) ratio of 80%.
- A Healthy Debt-to-Income Ratio (DTI): Lenders will require that you have a good debt-to-income ratio to qualify for a home equity loan with bad credit. Ideally, your DTI should be below 30% including the home equity loan. It’s not unheard of for lenders to offer financing to individuals with DTI ratios as high as 40%, but if you have poor credit, that’s less likely.
These factors can vary from lender-to-lender. For example, if your credit score is below 620, you could still get approved if you have stable employment, a lower DTI, or lots of equity in your home. If one aspect of your finances like your credit score is weak, the others must be stronger to make up for it.
To learn more about your debt-to-income ratio, calculate your current DTI, and find out how you can lower it, check out our detailed guide.
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.
If I Have Bad Credit, What Should I Do to Qualify for a Home Equity Loan?
If a home equity loan is the right financial choice for you, but bad credit is holding you back from getting favorable interest rates and terms, consider taking these steps before you apply.
1. Check Your Credit File and Make Improvements:
What if your credit score has been damaged by something you didn’t do? Although it’s rare, you should check your credit report for any inaccurate information and report it accordingly. Additionally, checking your report can show you credit lines that are in need of extra attention.
2. Lower Your DTI if Possible:
Your DTI will influence how large a home equity loan you can qualify for, so it’s vital you know yours. Lowering it by paying off credit cards or eliminating any other debts can help you qualify for a home equity loan even if you have bad credit.
3. Have Your Home Appraised:
To get a home equity loan, you’ll need your home to be appraised. This will determine how much your loan-to-value ratio (or, how much your home is worth vs. how much you owe on it). This will cost you about $400, but considering that home values are increasing across the country, it’s an important step to take before getting a home equity loan.
4. Use a Cosigner
You might be able to qualify for a home equity loan more easily if you bring on a cosigner with better credit than you. However, keep in mind that your co-signer will be liable if you’re unable to make the loan payments. This could forever damage your relationship with them, so only use a co-signer if it’s essential and you have a concrete plan for making payments.
5. Use a Smaller Bank
As we mentioned earlier, smaller banks or credit unions might be able to make offers that large lending institutions can’t. You may be able to leverage your history with them to qualify for a home equity loan or better loan terms by reminding them of how responsibly you paid back loans with them in the past.
Should I Get a HELOC or a Home Equity Loan for Bad Credit?
A home equity loan and a home equity line of credit (HELOC) are both useful financial tools. However, if you have bad credit, they’re probably not the best option for two reasons.
- Variable Interest Rate: HELOCs typically have variable interest rates. While you might save money at some points, you’re also vulnerable to large increases that can throw your finances out of order.
- Balloon Payments: Balloon payments can be confusing, but the upshot is that your monthly payments might not cover the HELOC’s cost during the draw period. This facilitates the need for a ‘balloon’ payment—a single, massive payment at the end of the repayment period. Balloon payments can be as small as twice the monthly payment and as large as the original HELOC value.
Both variable interest rates and balloon payments can be difficult to plan for. If you have bad credit, they can put you under further strain and make it even harder to repair your credit for future financing.
While a home equity loan might cost you more in the long run, the benefit is that you have a predictable monthly payment that can be worked into your budget.
Do I Have Other Options for Home Financing With Bad Credit?
If you have bad credit and aren’t sure that a home equity loan is right for you, you might want to know if you have other options. Some potential solutions for home financing with bad credit include:
1. Cash-Out Refinancing
With cash-out refinancing, you get a new, higher-balance mortgage which replaces your old one. You’d then be able to use the difference between those two mortgages any way that you’d use the funds from a home equity loan.
Mortgage refinancing has higher credit score requirements, but just like with a home equity loan, your overall financial picture will ultimately influence your eligibility.
2. Personal Loan
Depending on what you need the financing for, a personal loan might be a better choice. While they tend to have higher interest rates, they’re generally easier to get approved for, and a major benefit of a personal loan is that there’s no risk of having your home foreclosed on.
3. SKYDAN’s Home Equity Partner Solution
SKYDAN allows homeowners to access their home’s equity without worrying about monthly payments or interest rates. How? Because SKYDAN is a real-estate investment company—not a bank or lender.
This means that they’re not interested in what traditional lenders are. Bad credit, high DTI, no income—none of it matters to SKYDAN. The main eligibility requirement is that you have equity in your home.
Here’s how the program works:
- SKYDAN buys your home, but you don’t move out.
- You then agree to lease the home back from us at a mutually-agreed upon amount, not exceeding 2 years.
- Rent is deferred until the end of the agreement, meaning no monthly payment is due.
- You may then purchase the home back (original price + deferred rent) OR sell the property, at current market value, receiving all additional equity.
It sounds too good to be true, but it’s a safe program that genuinely helps people who are facing financial hardships. Ready to take the next steps?