If you own a home and have significant equity in the property, a home equity loan can be a potential source of cash to cover college tuition, renovations, or other expenses.
Though many lenders have stringent credit score standards regarding these loans, there are some that will approve borrowers with lower scores.
Qualifying for a Home Equity Loan
First, some good news: The most basic requirement for a home equity loan is that you have home equity. If you made a down payment, have paid off part of your loan, or your home has appreciated in value, you already have equity and are one step closer to a home equity loan.
However, lenders generally have tighter lending standards for home equity loans than for first mortgages, says Naomi Bakr, a senior mortgage banker at loan marketplace LoanSnap. If your credit is poor, you may need more equity to qualify than someone with stellar credit. “The value of the home needs to be high in comparison to the requested loan,” Bakr says.
Here are some other ways you can improve your chances of qualifying with a low score, according to Bakr:
- Have high, consistent income
- Own stocks, bonds, and other valuable assets
- Be current on your mortgage loan for at least the past 24 months
On the negative side, she notes, any bankruptcies or foreclosures on your record will be seen as major red flags.
Keep in mind that if you have a lower credit score, you’ll have to pay a higher interest rate than someone with a score of 700 or higher.
In September 2019, borrowers with credit scores ranging from 670 to 699 paid an average of 9.2% for a home equity loan of $50,000, versus just 6.2% for borrowers with scores of 740 and above, according to research from myFICO and Informa Research Services.
While the amount you can borrow will depend on many factors including your credit history, you generally won’t be able to borrow more than 85% of the value of your home. And as with all loans, the rates and terms vary from lender to lender, so make sure to shop around.
The Pros & Cons of a Home Equity Loan with Bad Credit
Getting a home equity loan comes with a number of pros and cons, especially if you have less-than-stellar credit.
On the positive side, rates on home loans are generally cheaper than private loans and credit cards, even with a lower credit score.
Second mortgages are also a strong option for debt consolidation. Consumers don't have to keep track of the many different loan payments and credit card payments—it is one easy payment that is at a much lower interest rate.” —Naomi Bakr, Senior Mortgage Banker at LoanSnap
On the downside, home equity loans mean adding a second mortgage payment to your financial obligations. If you already have poor credit, stacking on another expense might not be the wisest move. You’re also putting your home at risk for the loan and, because of your bad credit, paying a higher interest rate to do so.
Fixed interest rate and consistent monthly payments
Easy to predict and budget for
Interest may be tax deductible
Can be used to consolidate debt
More affordable than private loans and credit cards
Not every lender will be willing to underwrite the loan
Comes with a higher interest rate if your credit isn’t great
Adds a second monthly payment for many years
Uses your home as collateral, putting your property at risk
The Bottom Line
Though getting a home equity loan with bad credit can be tricky, it’s not impossible by any means. As with any mortgage loan, it’s smart to shop around and get several quotes before deciding which lender to use on your home equity loan. Compare the interest rate, APR, and terms, as well as individual fees and closing costs. You can also consider using a mortgage broker to help with the process or work on improving your credit score before applying. Waiting until you have a decent amount of equity in your home can also help.