Getting a Home Equity Loan With a Low Credit Score: A How-To Guide

Having a low credit score can make getting approved for a home equity loan more challenging. However, it is possible with the right strategies and preparation. In this article, I’ll explain what a home equity loan is, the requirements lenders have for borrowers with low credit scores, and steps you can take to boost your chances of approval.

What is a Home Equity Loan?

A home equity loan is a type of loan that allows homeowners to borrow against the equity they have built up in their home. Equity is the difference between what your home is worth and what you owe on your mortgage.

For example, if your home is worth $300,000 and you owe $180,000 on your mortgage, you have $120,000 in equity ($300,000 – $180,000) With a home equity loan, you can tap into that equity and receive the money in a lump sum

Home equity loans have fixed interest rates and set repayment terms usually between 10-20 years. The loan is secured by your home, meaning if you default the lender can foreclose.

Home Equity Loan Requirements for Low Credit Scores

When you apply for a home equity loan lenders will review these key factors

• Credit score: Most lenders look for scores of 620 or higher. The lower your score, the higher your interest rate will be.

• Debt-to-income (DTI) ratio: Your total monthly debt payments divided by gross monthly income. Lenders usually look for DTIs of 50% or less.

• Loan-to-value (LTV) ratio: The amount you want to borrow compared to your home value. Lenders require at least 15-20% equity.

• Equity: You’ll need at least 15-20% equity in your home to qualify.

• Income/employment: Proof of steady income and employment helps.

While each lender has its own criteria, meeting these general guidelines can help if your credit score is on the lower end. Doing what you can to boost your score beforehand will also improve your chances.

6 Tips to Get Approved for a Home Equity Loan With Low Credit

If your credit score falls short of ideal, here are some tips that could help you get approved:

1. Check your credit reports

Review your credit reports to check for errors that could be hurting your score unfairly. If you find mistakes, dispute them with the credit bureaus. Raising your score even a few points can help.

2. Lower your debt-to-income ratio

Pay down existing debts like credit cards and auto loans to reduce your DTI. This shows lenders you can manage additional debt responsibly.

3. Build your credit history

Apply for a secured credit card if you don’t have much credit history yet. Making on-time payments helps demonstrate you can handle credit.

4. Apply with a co-signer

Ask a friend or family member with good credit to co-sign the loan with you. Their income and credit will factor into approval.

5. Use a lending institution you have a relationship with

Banks you already have accounts with may be more flexible since you’re an existing customer.

6. Shop around with multiple lenders

Each lender has different requirements, so apply to several to increase your chances. Online lenders may offer more leniency.

How Home Equity Loans Work

Now that you know the requirements, here is a step-by-step overview of the home equity loan process:

1. Determine your home equity

Use an online calculator to estimate the equity you have available to borrow against.

2. Check your credit score

Get copies of your credit reports so you know where your score stands before applying.

3. Research lenders

Look for lenders that work with lower credit scores and compare interest rates and fees. Ask about credit requirements.

4. Complete the loan application

You’ll provide financial information including income, debts, assets and employment details. Multiple hard inquiries can temporarily hurt your score.

5. Home appraisal

The lender will order an appraisal to verify your home’s current market value and how much equity you have.

6. Loan approval

The lender will review your credit, income, debts and home value and make a decision. This can take anywhere from 2 days to 2 weeks.

7. Closing process

If approved, you’ll get a closing disclosure outlining the loan terms. A title search ensures no other liens exist on the property.

8. Funding

Once you sign the final loan documents, the funds will be deposited into your bank account, minus any closing costs.

Alternatives if Denied for a Home Equity Loan

If your application gets denied, here are a few other options to consider:

• Personal loans: Unsecured loans based on your creditworthiness alone. May have higher rates.

• 401(k) or life insurance loan: Borrow against existing accounts you have. Interest repaid goes back into your balance.

• HELOC: A home equity line of credit works similarly but is a revolving credit line.

• Cash-out refinance: Refinance your mortgage for more than you owe and take the difference in cash.

• Family loan: Ask family or friends to loan you money if you have a plan for repayment. Should be documented.

• Credit counseling: Non-profit agencies can help you manage debts and improve your credit.

In Summary

The bottom line is getting a home equity loan with bad credit takes some extra effort, but is doable if you meet the lender’s requirements. Improving your credit score, verifying your home equity, and looking at alternative lenders or products can help your chances of getting approved. While paying higher interest rates may be unavoidable, a home equity loan can be a useful financing option if used responsibly and if you make payments on time.

Frequency of Entities:

home equity loan: 23
low credit score: 7
credit score: 6
equity: 6
lenders: 5
loan: 4
mortgage: 2
credit: 2
debt: 2
income: 2