How to Get a Home Equity Loan With Bad Credit

It's possible, but only certain lenders will approve you.

A red suburban house with beige trim
David Papazian/Getty

Good news for people who want to take equity out of their home but have poor credit: It's possible to get approved for a home equity loan, but be prepared to meet stringent requirements to qualify and to pay high interest rates for your loan. 

Some banks and lenders will approve you for a home equity loan if you have sufficient income and aren't carrying a lot of debt, because your house serves as collateral for the loan. Here's what you need to know about how to qualify for a home equity loan and a home equity line of credit, or HELOC, if you have bad credit.

How to qualify for a home loan with bad credit

Not all lenders operate by one standard set of credit guidelines, so it's important to shop around, but keep in mind the more common requirements to qualify for a home equity loan or HELOC. Although requirements vary, most lenders want to see a minimum credit score in the mid-600 range and a sizable percentage of equity in your home (usually 15% to 20%). 

Your credit score is a critical part in determining the interest rate your lender will charge you. Even if you have a score that is considered good under FICO rules -- 670 to 739 -- you'll have to pay a higher interest rate than someone with exceptional credit, which is 800 to 850.

Common requirements for a home equity loan and a HELOC

  • You must have at least 15% to 20% equity in your home
  • A minimum credit score of 670 (which will vary by lender)
  • A maximum debt-to-income ratio of 43% (although some lenders will accept as high as 50%)
  • A verifiable income and consistent employment 
  • A history of on-time bill payments

Which lenders will approve you with bad credit?

If you have bad credit, expect to pay higher lender fees and have less flexible borrowing options available to you. Fortunately, there are four lenders who offer amenable terms for those who have less than stellar credit.

Lenders to consider for bad credit

Lender Loan amount APR range Customer service
Fifth Third Bank $10,000 to $500,000 5.72% to 12.65% 866-671-5353
Flagstar Bank $10,000 to $1 million Variable, starting at 6.99% 888-686-1454
Rockland Trust $25,000 to $400,000 Starting at 5.74% 508-732-7072
Third Federal Savings & Loan $10,000 to $200,000 Starting at 5.99% 800-844-7333

Fifth Third Bank: Only available for borrowers in Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee and West Virginia.

Flagstar Bank: Good for homeowners who need high loan amounts and don't want to pay closing costs. 

Rockland Trust: Only available in the New England area, but good for low APRs.

Third Federal Savings & Loan: Ideal for those who need a long repayment period and want the option to choose a fixed-rate or variable-rate loan.

How to apply with bad credit

Here are the steps to take to apply for a home equity loan if you don't have good credit.

1. Review your credit report

Your credit is one of the first factors lenders will look at when determining your eligibility for a home loan. It's important to monitor your credit regularly to make sure it's accurate and up-to-date. The last thing you want are surprises on your report, such as past negative hits that have since been resolved but haven't been corrected on your credit report that still make you seem like a risky borrower. You can receive a free weekly credit report through the end of this year by visiting AnnualCreditReport.com. Also, set up alerts that notify you the moment your credit score drops. 

2. Calculate your debt-to-income ratio

Your debt-to-income ratio, or DTI ratio, is the total of all of your monthly debt payments divided by your gross income. You can use a DTI calculator to determine yours or do the calculation below.

Monthly debt payments / monthly gross income = DTI ratio

For example, if you earn $6,000 a month and have $1,500 a month in debt payments (be it credit cards, student loans, a car loan or all of the above), the calculation for your DTI is simply:

$1,500 (monthly debt payments) / $6,000 (monthly gross income) = 0.25, or 25% DTI 

That 25% is certainly within the limit for lenders. Although a DTI of 43% is the highest ratio many banks are willing to consider (with a few accepting as high as 50%), they prefer that a borrower has a DTI ratio no higher than 36%.

3. Make sure you have enough equity

Having enough equity in your home is critical to securing a home loan with bad credit. Without enough equity, a lender won't approve you regardless of your credit score or income. Most lenders typically want to see 15% to 20% at a minimum. The more equity you have built up, the more attractive a candidate you are for a loan with better terms. 

You'll want to consider working with the lender that originated your first mortgage, as you already have a relationship and your lender knows you've been making on-time, consistent mortgage payments over the years.

You can also use a home equity calculator to figure out if you have enough equity to qualify for a loan.

4. Determine how much you need

Even if a lender approves you for a higher loan amount than you need, you don't want to take out more than you're able to pay back. The way that lenders determine how much you can borrow is by assessing your loan-to-value ratio, or LTV ratio. Your LTV is your outstanding mortgage balance divided by your home's current value. If, for example, your house is valued at $500,000 and you have $150,000 left to pay on your mortgage the calculation is: 

$150,000 / $500,000 = 0.70, or 70% LTV

A lender will usually let you borrow between 75% and 90% of your available home equity. To figure out that amount, use the following calculation:

[Current appraised value] x [maximum equity percentage you can borrow] - [outstanding mortgage balance] = The amount a lender will let you borrow

In this example, a lender is willing to let an applicant borrow up to 85% of their home equity:

$500,000 [current appraised value] x 0.85 [maximum equity percentage you can borrow] - $350,000 [outstanding mortgage balance] = $75,000 [what the lender will let you borrow]

Another important ratio is your combined loan-to-value, or CLTV, ratio, which is the ratio of all outstanding loans secured against your property divided by your home's current value. Most lenders want to see a CLTV of 85% or less.

5. Compare interest rates

The interest rate is another critical component used when calculating your loan because even one tenth of a percentage point can add thousands of dollars to your mortgage over the years. Take the time to compare and review interest rates.

6. Use a cosigner 

Consider asking a family member or friend to co-sign your loan provided they have a solid credit history and financial history. With a co-signer, the bank is willing to lend you the money because the co-signer is on the hook for your loan payments if you fall behind for any reason. If you can't make your payments, your co-signer has to make them for you. Make sure you and your co-signer are comfortable with agreeing to such a serious, long-term financial arrangement. Also, be certain your co-signer understands that their credit score is on the line, as it will drop if you miss payments.

7. Try boosting your credit first

It may be worth delaying your loan application until you can improve your credit. That's because securing the lowest interest rate possible and minimizing fees will save you tens of thousands of dollars over the lifetime of your loan. You'll also have access to more loan options with more favorable terms, such as higher borrowing limits, if you raise your credit score before applying. 

Alternative financing options

You can apply for other types of loans if you have bad credit, but you'll likely have to pay much higher interest rates and the amount you can borrow will be limited.

  • Personal loan: A personal loan isn't secured by your home, so banks will charge you higher interest rates to borrow the money. The average rate for a personal loan is currently 11.27% according to CNET's sister site Bankrate. But if you have bad credit you should expect to pay a much higher rate. Personal loans also usually have shorter repayment terms than home equity loans.
  • Cash-out refinance: A cash-out refi replaces your current mortgage with a new one, but with a lower interest rate and terms. However, it won't make sense for most homeowners right now as mortgage rates are at their highest level in 20 years, canceling out the benefit of refinancing to a lower rate. 
  • Reverse mortgage: A reverse mortgage is only available to homeowners age 62-years and older -- the benefit is that you don't have to make monthly mortgage payments and the bank or lender actually makes monthly payments to you. You have to continue paying your property taxes and homeowners insurance and use the house as your primary residence to qualify.

If you get approved, keep improving your credit

It's wise to repair your credit regardless of what condition it's in, but it's especially helpful when applying for a home loan. Focus on strategically paying down your credit card balances -- start with the cards that have the highest interest rates and the highest balances. You can also work with a credit repair agency, but make sure you're working with a reputable company or nonprofit, and be aware of common scams to avoid

The bottom line

It's possible to qualify for a home equity loan if you have bad credit, but you'll pay higher interest rates and higher fees to your lender. Not all lenders will approve homeowners with bad credit for a loan, so you'll need to research ones that offer reasonable rates and terms for borrowers with less than stellar credit. Compare rates and fees to make sure you're getting the best deal possible, as it'll save you tens of thousands of dollars over the lifetime of your home loan.