How To Get A Home Equity Loan With Bad Credit

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The Credit Review
January 28, 2020 Credit Repair Personal Loans
How To Get A Home Equity Loan With Bad Credit

Home equity loans and HELOCs allow homeowners to receive cash for their home equity. These funds can be used for a variety of reasons, such as home renovations or debt consolidation.

Unfortunately, if you have bad credit, qualifying for a home equity loan or HELOC may be difficult. However, there are still ways in which you can qualify or find a good alternative.

What Is A Home Equity Loan?

A home equity loan is a loan that allows homeowners to use their home equity as collateral. This takes the second place to the first lien mortgage and you can generally only borrow 75 to 80% of the loan-to-value ratio in your home and your qualifications are based on how much you owe on the value of your first lien mortgage; for example, if you owe 60% of the value of your home on the first lien, you may be able to borrow another 20% of the value with a home equity loan. Interest is paid on the full loan amount borrowed.

What Is A HELOC?

A HELOC (home equity line of credit) is similar to a credit card and allows you to draw funds from an account as you need it -- without going over the maximum amount.

A HELOC uses your home as collateral has a set period of time in which you can draw funds and pay only interest on the borrowed amount; after this period of time has passed, the loan must be paid off.

Qualifying for a HELOC depends on your lender or bank but most HELOCs have similar requirements:

  • At least a year of positive mortgage history
  • Enough income to pay back your loan
  • Lend 80% or more of your home equity
  • A minimum credit score of 620
  • A debt-to-income ratio below 41%

What Are The Pros And Cons Of A Home Equity Loan Or HELOC?


  • You can use your loan or credit line however you want.
  • Interest rates are generally lower than what you receive with a credit card.
  • Adjustable rates carry even lower interest rates.
  • HELOCs only have you pay interest on the amount you borrow.
  • Having a minimum credit score ofew 620 may be enough to qualify with some lenders.


  • Lenders charge closing costs and additional fees.
  • Your home is put on the line as collateral.
  • Your bank can cancel your line of credit at any time.
  • Using your home equity loan or line of credit for any purpose can be risky since you turn unsecured debts into secured debts, meaning you could lose your home if you fail to make on-time payments.

What Is The Best Credit Score To Get A Home Equity Loan Or HELOC?

Your credit score is an important factor when it comes to taking out a loan. Aside from qualifying, a good credit score means you will receive lower interest rates and save you thousands of dollars in the long run.

Most lenders require a minimum credit score of 620; a higher score means you will receive more favorable terms.

What Can I Do To Improve My Credit?

Qualifying for a home equity loan or HELOC could be determined by just a few points and your overall credit history. Bad credit can also prevent you from refinancing your loan.

Your interest rates are based directly on your credit, so the higher your credit score is, the lower your interest rate will be.

There are a few steps you can take to improve your credit to apply for a loan and receive the best rates:

  • Pay your credit cards on time and reduce the total balance. 35% of your FICO® score is based on your payment history.
  • Avoid closing any accounts; if you still spend the same amount, you will be using a bigger portion of your available credit. Credit utilization accounts for 30% of your FICO® credit score, so the more credit you have available, the better your score. Ideally, you want your credit balances to stay below 10%.
  • Opt to take out a credit builder loan, which is a loan secured by your personal funds and repaid monthly.
  • Take out another line of credit and keep low credit utilization.
  • Ask a trusted friend or family member to add you to their credit card as an authorized user. Be sure that the account has been active for a few years and that it has had on-time payments; this is important since the entire history of that account will be reflected in your credit history.
  • Consider a professional credit repair service. They can work on your behalf to find and dispute errors on your credit reports such as identity fraud, incorrect payment statuses, and negative strikes for late payments.

It can take around 1 to 3 months to see any changes in your score. In the meantime, be sure to use a credit monitoring service that gives you regular updates on your credit score.

Where Can I Get A Home Equity Loan Or HELOC?

Borrowers who are interested in taking out a home equity loan or HELOC can turn to their local bank or credit union and traditional or online lenders. In general, it is easier to qualify for a home equity loan or HELOC through your local credit union since you most likely have a history of them.

What Should I Expect With The Application Process?

Applying for a home equity loan or HELOC is similar to a mortgage application. Your paperwork will require personal information, financial information, and documentation such as your bank statements, pay stubs, and tax returns.

If you don't have a recent new home appraisal, your lender will most likely have you purchase one and provide the property survey, proof of insurance, and title policy. Funding can take up to a month or more.

What If I Have Bad Credit?

You can still qualify for a home equity loan or HELOC if you have bad credit. However, you will find that the terms and interest rates are less favorable than what you would receive with good credit.

Keep in mind that your home is used as collateral to secure your loan, which means that the bank will get your home if you fail to repay it.

What Are Some Alternatives To A Home Equity Loan Or HELOC?

If you are still unable to get a home equity loan or HELOC due to your credit, then don't worry -- you still have options.

Sale Leaseback

One of the newer alternatives in the market is a sales-leaseback program. Residential sale and leaseback companies like EasyKnock buy your home, pay off your mortgage, and then release the home equity back to you while either letting you live in your home as a tenant and paying monthly rent or buying it back eventually. This allows you to use a portion of the equity you have built and the amount you receive is based on your equity -- not your credit score.

Cash-Out Refinancing

Cash-out refinancing is similar to a home equity loan in the sense that you can receive cash using your home equity, except that your loan balance is transferred to a new lender. This allows you to borrow up to 80% of the loan-to-value ratio.

Refinance Your Mortgage

You can refinance your mortgage to receive cash, but this may not be the best solution in the long run since your new mortgage rates could increase due to poor credit.

Reverse Mortgages

Reverse mortgages are available for consumers who have reached retirement age. If you are 62 or older, you can convert your home equity into cash.

Sell Your Home

You can sell your home to receive the full equity, but this requires enough time and you may not want to move.

Streamline Refinance

FHA and VA streamline refinance programs are ideal for consumers who already have an FHA loan. These don't require an appraisal, credit check, or income verification.

Refinancing your mortgage can save you thousands of dollars in the long run.

The Home Affordable Refinance Program

HARP (The Home Affordable Refinance Program) allows borrowers who have a Freddie Mac or Fannie Mae backed loan from before May 31st, 2009 (usually from lenders like Bank of America, Chase, and Wells Fargo) to refinance.

Borrowers who are struggling with mortgage payment or have very little equity can still qualify.

Personal Loans

Personal loans can also give you the cash you need for nearly any reason, although these won't allow you to have the tax benefits that are given by paying interest on a home loan.

Personal loans can be secured (with a personal asset or other collateral) or unsecured. Secured loans allow you to have lower interest rates, although these can be riskier since you could potentially lose an asset.

Personal loans are available for borrowers with good, fair, and bad credit. Be sure to shop around with various lenders before settling on the right one for you.

Cash Advances And Payday Loans

While we don't recommend this, you could take out a cash advance on your credit card or payday loan in a worst-case scenario. However, the interest rates on this are incredibly high and could result in a dangerous cycle of debt.

The Bottom Line

If you are struggling with poor credit, you still have options to tap into your home equity. In the case that you can't take out a home equity loan or HELOC, we recommend using a sale-leaseback program like EasyKnock or taking out a personal loan.

How can I improve my credit to qualify for better rates on my mortgage?

  • Consider credit repair and contact a credit repair service
  • Always pay your bills on time
  • Deal with past due accounts
  • Reduce your credit utilization
  • Keep old credit accounts open
  • Open new credit (but avoid applying for too much new credit)
  • Monitor your credit

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