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Getting approved for a home equity loan with bad credit can seem daunting, But having a credit score around 580 doesn’t necessarily mean you won’t qualify,
As a homeowner, the equity you’ve built up in your property can act as collateral, making lenders more willing to work with lower credit scores. While every lender has their own requirements, it is possible to get a home equity loan with a credit score as low as 580.
I’ve helped many clients in similar situations navigate the home equity loan process. In this article, I’ll explain what credit score most lenders look for, what factors impact your chances of approval, and tips for finding a lender to work with bad credit.
What Credit Score Do Most Lenders Require?
The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850. In general, a FICO score above 670 is considered good credit, while a score below 580 is seen as poor.
According to my experience, most home equity lenders look for a minimum credit score around 620 to 640. But that doesn’t necessarily mean a 580 credit score will disqualify you.
Rather than just looking at your credit score, lenders take a more holistic look at your finances. Here are some other key factors they consider:
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Debt-to-Income (DTI) Ratio: This compares your monthly debt payments to your gross monthly income. Most lenders want to see your DTI below 50%.
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Loan-to-Value (LTV) Ratio: The LTV looks at how much equity you have built up in your home. Lenders typically require an LTV of 80% or less.
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Payment History: Having a solid track record of paying your mortgage and other debts on time can help offset a lower score.
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Amount of Available Credit: Lenders may view maxed out credit lines negatively, even if you make payments on time. Keeping credit card balances low helps.
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Credit History Length: A longer history can demonstrate you are able to manage debt responsibly over time.
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Credit Mix: Having different types of credit (mortgage, auto loan, credit cards) shows you can handle different types of lending responsibly.
As you can see, lenders don’t make decisions based on your credit score alone. As long as you have sufficient equity and your other qualifications check out, a 580 credit score doesn’t have to be a deal breaker.
Tips to Improve Your Chances of Approval
If your credit score is around 580, here are some tips that can help boost your chances of getting approved:
1. Check your credit reports
Before applying, pull your credit reports from AnnualCreditReport.com and review them carefully. Look for any errors dragging down your score and dispute them immediately. Also make sure negative marks like collections are reporting accurately.
2. Pay down credit card balances
If you have high credit card balances compared to your limits, paying them down can help improve your score quickly. Try to get balances below 30% of the card limit.
3. Become an authorized user
Ask a family member with good credit to add you as an authorized user on a credit card they manage responsibly. This can give your score a boost.
4. Avoid new credit inquiries
Each new application causes a hard inquiry, which can knock a few points off your score. Avoid applying for new credit in the months leading up to your home equity loan application.
5. Bring in a co-signer
Adding a co-signer with a good credit score can help you get approved and potentially lower the interest rate. Just be sure they understand the obligation they are taking on.
6. Offer to pledge collateral
Some lenders may be willing to accept pledged collateral, like a savings account or vehicle, to offset credit risk.
7. Shop around
Compare offers from banks, credit unions, and online lenders. Consider both home equity loans and cash-out refinances.
Where to Find Lenders to Work With a 580 Credit Score
As you shop around for home equity loan offers, here are some places that may be willing to work with a 580 credit score:
- Local banks and credit unions
- Online lenders like LendingTree and Lightstream
- Mortgage brokers who have access to subprime lenders
- Credit repair mortgage programs through lenders like PrimeLending and Carrington Mortgage
- FHA Title 1 loans, which are government-backed and designed for home improvement
- Home Affordable Refinance Program (HARP), which lets you refinance with negative equity
It’s important to compare multiple offers and go with the lender providing the lowest rates and fees. Be prepared to provide documentation to back up any extenuating circumstances behind your low credit score.
The loan officer will be looking for reasons to get you approved, so the more context you can provide, the better.
Alternatives if You Can’t Get Approved
If you’ve taken all possible steps to boost your home equity loan eligibility but still can’t get approved, here are some alternative options to consider:
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FHA 203(k) loan: This allows you to wrap home improvements into your mortgage by financing up to $35,000.
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USDA home improvement loan: For homeowners in rural areas, this government-backed loan covers up to $20,000 in renovations.
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Personal loan: An unsecured personal loan will have a higher rate but doesn’t put your home at risk if you default.
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0% APR credit card: Finance smaller home projects interest-free with a 0% intro APR card. Just be sure you can pay it off before rates rise.
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HELOC after credit repair: Take 6-12 months to improve your credit score, then reapply for a HELOC.
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Cash-out refi after credit repair: Same concept as above but with a cash-out refinance.
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Save up: Slowly build up a home improvement fund by making automatic deposits to a high-yield savings account.
The Bottom Line
While getting a home equity loan with a 580 credit score can be challenging, it is possible with sufficient equity, low debt, and a lender willing to look at your full financial picture. Being patient, exploring alternative options, and taking steps to boost your score can help you reach your goals.
The most important thing is to not let a low credit score deter you from applying. The only way to know for sure if you’ll qualify is to submit an application and allow the lender to fully evaluate your situation. With persistence and the right approach, homeowners with a 580 credit score can still often get approved.
Write a letter to the lender
Write a letter of explanation describing why your credit score is low, especially if it has taken a recent hit. This letter should matter-of-factly explain credit issues — avoid catastrophizing — and include any relevant paperwork, like bankruptcy documentation. If your credit score was impacted by late payments due to job loss, for example, but you’re employed now, your lender can take this context into consideration.
Determine your equity level
To qualify for a home equity loan, lenders typically require at least 15 percent or 20 percent equity. The amount of equity you have, your home’s appraised value and combined loan-to-value (CLTV) ratio help determine how much you can borrow. Home Equity Bankrate’s
To estimate your home’s equity, take the value of your home and subtract the balance left on your mortgage. While lenders will only consider the official appraised value of your home when determining how much you can borrow, you can get an idea of your home’s value through Bankrate or a real estate listing portal or brokerage. Let’s say your home is worth $420,000 and you have $250,000 to pay on your mortgage:
$420,000 – $250,000 = $170,000
In this example, you’d have $170,000 in home equity. That doesn’t mean you can borrow $170,000, however. If the lender requires you to maintain at least 20 percent equity, you’d need to preserve $84,000 ($420,000 * 0.20). That leaves you with a home equity loan of up to $86,000 ($170,000 – $84,000).
Say you want to add a $60,000 home equity loan to the mix. That would increase your total mortgage debt — for both your first mortgage and the home equity loan — from $250,000 to $310,000.
That 20 percent equity requirement also means you’d need a CLTV ratio of 80 percent or lower. To calculate your CLTV ratio, divide the total mortgage debt ($310,000) by the value of your home ($420,000):
($250,000 + $60,000) / $420,000 = 73.8%
In this example, you’d be under the lender’s 80 percent CLTV requirement.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
Can I get a home equity loan with a 580 score?
Can you get a home loan with a 580 credit score?
What is the lowest credit score to get a home equity loan?
Can I get a HELOC with a 560 credit score?
What are the requirements for a home equity loan?
Most lenders expect you to meet the following requirements for a home equity loan: Most home equity lenders require at least a 680 credit score, though some are still willing to lend you money even if you can’t quite meet that bar.
What is a good credit score for a home equity loan?
However, most lenders rely on your FICO credit score, which sometimes requires a payment to see the score—though some credit card companies allow customers to get their FICO scores for free. Most lenders require a score of at least 680 in order to get approved for a home equity loan. That’s considered a “good” score.
Can I get a home equity loan with bad credit?
However, you may still be able to qualify for a home equity loan with bad credit. Since home equity loans are secured by your property, meaning your home serves as collateral if you default on the loan, there’s less risk to the lender. And it can help if your other financial qualifications are strong. 2. Calculate Your Monthly Debt-to-Income Ratio
Can you get a home equity loan with a low credit score?
A lower credit score doesn’t necessarily mean a lender will deny you a home equity loan. It does mean the loan will be more expensive, as you won’t get the lowest interest rate. It’s possible to get a home equity loan with a fair credit score — as low as 620 — as long as other requirements around debt, equity and income are met.