Can You Get a Home Equity Loan with Bad Credit?

To get a home equity loan with bad credit, you’ll need more income, more home equity and less total debt than someone with good credit. You’ll also pay a higher rate, but it may be worth it if you need to pay off high-interest debt or make some improvements that boost your home’s value.

On this page

How to qualify for a home equity loan with bad credit

Home equity loan requirements are stricter than for a traditional mortgage because a home equity loan is considered a “second mortgage,” which means it’s paid after your first mortgage if you default and the lender forecloses on your home.

If you’re getting a home equity loan with bad credit, lenders will need to:

• Verify you have at least 15% equity in your home. Home equity lenders typically allow you to borrow up to a maximum of 85% of your home’s value. Equity is the difference between the home’s market value and your current mortgage balance.
• Cap your loan amount at a set combined loan-to-value ratio. A loan-to-value (LTV) ratio measures how much your total loan amount is compared to your home’s value and is expressed as a percentage. The balance of your current loan plus your new home equity loan balance can’t exceed the LTV ratio limits set by the lender. It’s common for 85% to be the limit, but some lenders may offer 100% LTV home equity loan options.
• Review your credit scores and payment history. Most home equity lenders require at least a 620 credit score and will also verify which types of accounts you use, how much you owe, how long the accounts have been open and, most importantly, if you’ve paid the accounts on time.
• Check your debt-to-income ratio. You’ll need to prove you earn enough to cover your current monthly bills plus the new home equity loan payment. Usually, the percentage of your gross monthly income used to repay debt, known as your debt-to-income (DTI) ratio, can’t be higher than 43%. However, lenders may set even stricter requirements for borrowers with bad credit.

What counts as bad credit, anyway?

”Bad” isn’t a term used by the credit bureaus that track your credit score. But, for the purposes of getting a home equity loan, a credit score below 680 is considered nonprime or subprime and may make it difficult to get approved. The easiest way to get a home equity loan with bad credit is to have a low debt-to-income (DTI) ratio and low loan-to-value (LTV) ratio. But if getting a home equity loan with your current credit score and finances isn’t in the cards, you may have to put things on hold and take some time to rebuild your credit.

6 steps to apply for a home equity loan with bad credit

The process of applying for a home equity loan with bad credit is similar to getting any other type of mortgage, but there are a few extra steps you’ll need to follow.

1. Gather information about your current mortgage

Home equity lenders will need a copy of your most current monthly mortgage statement to make a final home equity loan offer.

2. Check your home’s value

If you’re not sure, you can use a home value estimator or ask the real estate agent that helped you buy your home to prepare a comparable market analysis. However, the lender will usually order a home appraisal to confirm the value, so don’t count your home equity money just yet.

3. Try a home equity loan calculator before you apply

Once you know your home’s value and your current mortgage balance, a home equity loan calculator can help you estimate how much you’ll likely be able to borrow. Lenders calculate your maximum home equity loan amount by multiplying your home’s value by the max LTV ratio they allow and then subtracting your outstanding mortgage balance. The calculator does the math for you and gives you a rough idea of whether the full application is worth the effort.

4. Write letters of explanation for your bad credit in advance

If you’ve had some tough financial times, write a letter to explain to lenders what happened and how you’ll be able to repay the home equity loan. Be prepared to provide documentation, such as bankruptcy papers, divorce decrees or anything else related to your financial situation, to accompany the explanation letter.

Still looking for a lender?

Here’s how to find the best company for your home equity loan.

5. Apply with three to five home equity lenders

You may need to shop around more to get a home equity loan with bad credit, as not all lenders offer them. Using a home equity loan comparison tool can save you time by allowing you to enter your information and get calls from lenders that will compete for your business as you shop for loans.

6. Provide your documents and close your home equity loan

Once your home equity loan is approved, the process is similar to getting a regular mortgage. The lender verifies all the information from your application, and once it’s finalized, you’re ready for closing. After you sign your paperwork, you’ll receive the funds from your home equity loan at the end of your right-to-cancel period, which lasts for three business days.

Pros and cons of a home equity loan with bad credit

Pros

  Interest rates are lower than personal loan interest rates

  Funds are disbursed quickly and can be used for any purpose

  Fixed-rate payments stay the same for the life of the loan

  Interest may be tax-deductible if used for home improvements

Cons

  Lenders could foreclose and you could lose your home if you default

  Interest rates and the monthly payment will be higher than if you had good credit

  You may be limited to a lower maximum loan amount because your credit is low

  Interest is not tax-deductible if it’s used for debt consolidation

Can I get a HELOC with bad credit?

Another popular second mortgage option for tapping your home’s equity is a home equity line of credit (HELOC). A HELOC works like a credit card for a set time called a “draw period,” during which you can borrow from your credit line. After that time, the balance must be paid off in installments.

Common features of HELOCs include:

• Up to a 10-year draw period when you can charge and pay off the balance as needed
• The option for interest-only payments during the draw period
• Variable rates for the life of the credit line
• Annual maintenance fees, membership fees and termination or prepayment fees
• Terms of five to 20 years

Pros and cons of choosing a HELOC over a home equity loan

Pros

  The interest-only option temporarily keeps the payment lower than a home equity loan

  Flexibility to charge and pay off the balance as needed during the draw period

  Payments are only based on the amount used

Cons

  Variable rate could result in a higher payment if interest rates rise

  Ongoing maintenance, membership, termination or early payoff fees may apply

  The payment could become unaffordable after the draw period ends and the balance is due

How to find the best bad credit home equity loan lenders

The best way to find a home equity loan is to comparison shop with three to five lenders. Here are several from our list of the Best Home Equity Lenders of 2023.

Lender	Minimum credit score	Maximum LTV	Maximum DTI	Lender review
	Home equity loan: 620 HELOC: 680	Home equity loan: 95% HELOC: 95%	Home equity loan: 50% HELOC: 45%	Read our review
	HELOC: 620	HELOC: 85%	HELOC: 50%	Read our review
	Home equity loan: 700 HELOC: 650	Not disclosed	Not disclosed	Read our review
	Not disclosed	HELOC: 95%	Not disclosed	Read our review

Compare Free Loan Offers

If you’re not quite sure that a home equity loan meets your financial needs, consider these other home equity-tapping options.

Cash-out refinance

Conventional and government-backed loan programs allow you to replace your existing mortgage with a larger loan amount and pocket the difference with a cash-out refinance. If current mortgage rates are low or your credit scores are below minimum standards for a home equity loan, a cash-out refi program may be right for you.

A cash-out refinance typically comes with:

• Lower interest rates compared to a home equity loan or HELOC
• Higher closing costs because you’re taking out a larger loan
• The ability to get approved for up to 80% of your home’s value with an FHA cash-out refinance
• DTI ratio limits up to 50% for conventional and FHA loans, and up to 41% for VA loans
• A borrowing limit of up to 90% of your home’s value if you’re a military borrower eligible for a VA cash-out refinance
• Longer terms up to 30 years

Reverse mortgage

If you’re 62 years old or older, you may be eligible for a reverse mortgage to convert equity into income without making a monthly payment. The catch: Your loan grows over time instead of shrinking because the monthly interest is added to your loan balance.

Features of a reverse mortgage include:

• More options to receive your equity than you’d have with a home equity loan, including monthly payments, a line of credit or a lump sum
• No minimum credit score requirement for the home equity conversion mortgage (HECM)
• Requirement to prove you aren’t delinquent on any federal debt and can pay ongoing property taxes, homeowners insurance and maintenance costs
• Higher closing costs than a home equity loan, with lender fees up to $6,000
• Losing home equity over time because your loan balance grows instead of shrinks

Personal loan

A personal loan is unsecured and typically comes with higher rates and a shorter repayment term. Because it’s not secured by your home, there’s no risk of losing your home if you default on a personal loan.

Borrowers with credit issues will be pleased to find that personal loans for bad credit exist that set credit score minimums as low as 300.

Personal loans typically allow you to:

• Prequalify without taking a credit hit
• Use the money as you wish, for almost anything
• Avoid securing the loan with a home or other collateral
• Have a fixed interest rate and regular, consistent payments that won’t vary
• Choose a no-fee option if you’d prefer
• Receive funds quickly, in one to seven days on average