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Getting approved for a home equity loan with bad credit in Texas can seem daunting, but it is possible if you understand the requirements and find the right lender In this comprehensive guide, we will explain everything you need to know to improve your chances of home equity loan approval despite having poor credit
What is Considered Bad Credit for Home Equity Loans in Texas?
In Texas, a credit score below 640 is generally considered bad credit by home equity lenders. The lower your score, the harder it will be to get approved. Here are the credit tiers that determine your loan options:
- Excellent credit: 760+
- Good credit: 700-759
- Average credit: 680-699
- Poor credit: 640-679
- Bad credit: 639 or lower
With a score in the poor or bad range, you can still potentially qualify for a home equity loan but will pay higher interest rates.
Texas Home Equity Loan Requirements
In addition to your credit score, Texas home equity lenders look at these key factors when reviewing your loan application
Loan-to-Value (LTV) Ratio
This compares the loan amount to your home’s value Most lenders require an 80% LTV ratio or lower. With bad credit, you may need a 70% LTV or lower to qualify. Having equity built up in your home helps offset the risk of your low credit scores.
Debt-to-Income (DTI) Ratio
Lenders want to see your total monthly debt payments take up no more than 43% of your gross monthly income. This includes the new loan payment. With bad credit, you’ll need a lower DTI ratio to improve your chances.
Home Value
There are no minimum home value requirements for home equity loans in Texas. However, the more equity you have, the better.
Minimum Income
Lenders typically want to see stable income sufficient to cover your existing debts and new loan payment. Provide recent pay stubs or bank statements to verify income.
Homestead Exemption
Your property must have a homestead exemption to qualify for a Texas home equity loan. This provides protections in the case of default.
Other Factors
Length of time in your home, assets, payment history on current mortgage and other debt accounts will also be considered.
Finding the Best Bad Credit Home Equity Lender in Texas
Shopping around with multiple lenders is key to finding the right loan program for your situation. Here are some top lenders to consider:
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LendingClub – Offers home equity loans and HELOCs with minimum 640 credit score. Fixed rates as low as 7.49%.
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Lightstream – Personal loans secured by home equity for those with poor credit. Rates from 7.49% APR.
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Quicken Loans – Allows credit scores as low as 620. Offers both fixed and variable rate options.
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LoanDepot – Has programs for borrowers with credit scores starting at 600. Competitive rates and fees.
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New American Funding – Known for approvals with weaker credit. Check requirements as low as 620 FICO.
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PrimeLending – Custom programs available for borrowers who don’t meet conventional requirements.
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AmeriSave Mortgage – Provides exceptions on credit and income requirements on a case-by-case basis.
When comparing lenders, look at interest rates, fees, loan amounts offered, and minimum requirements. Getting rate quotes from multiple lenders helps ensure you find the most competitive financing option.
Tips for Improving Your Chances of Approval
If your credit score or debt-to-income ratio fall short of lender requirements, take these steps to strengthen your home equity loan application:
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Pay down revolving balances – Reducing credit card balances can immediately help improve your DTI.
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Pay all bills on time – Timely payments will boost your credit. Set up autopay or payment reminders to avoid missed payments.
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Limit new credit applications – Too many recent inquiries from applying for new credit can negatively impact your scores.
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Provide explanations for derogatory credit – Attach letters describing past issues that affected your credit.
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Have a down payment ready – Coming up with 10-20% of the loan amount to pay upfront shows good faith.
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Offer collateral – Putting up an asset as additional security for the loan may help with approval.
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Apply with a co-signer – Adding a co-signer with better credit can get you approved and lower the rate.
Home Equity Loan Alternatives with Bad Credit
If you have trouble qualifying for a home equity loan, here are a couple alternative options to tap home equity with poor credit:
1. Cash-Out Refinance
With this option, you refinance your existing mortgage into a larger loan and take cash out. Requirements are less strict than a home equity loan, making it possible to get approved with bad credit. You can potentially get up to 80% of your home’s value.
2. HELOC
A home equity line of credit functions like a credit card tied to your home’s equity. Compared to a fixed-rate loan, HELOC requirements tend to be more lenient. Minimum credit scores may be as low as 600.
What is the Process for Getting a Home Equity Loan in Texas?
Follow these key steps when applying for a Texas home equity loan:
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Check your home equity – Use an online calculator to estimate how much equity you have available to borrow against.
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Compare lenders and prequalify – Get rate quotes and apply for prequalification to find the best loan offer without impacting your credit score.
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Submit full application – Once prequalified, complete the full application with income verification, home value assessment, and credit check.
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Get loan approval – If approved, the lender will provide a loan estimate outlining terms, projected closing costs, and the interest rate.
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Undergo appraisal – An appraiser will visit your home to determine current market value.
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Review disclosures – Carefully review the loan estimate, closing disclosure, appraisal, and other legal paperwork.
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Close the loan – At the closing appointment, sign final loan documents and the funds will be distributed.
Expect the process to take 2-4 weeks from completing the application to closing. Having all required documents ready speeds things along.
What Are the Pros and Cons of Texas Home Equity Loans?
Home equity loans offer several benefits, along with some potential drawbacks to weigh:
Pros
- Access large lump sum at competitive rates
- Lock in fixed rate and term for predictable payments
- Interest may be tax deductible (consult a tax pro)
- Use funds for any purpose – no restrictions
- Quick access to cash in as little as a week
Cons
- Require having substantial home equity built up
- Second lien makes default riskier with potential foreclosure
- Closing costs and fees can be high
- Miss out on equity growth by borrowing against home
For many Texas homeowners needing cash for debt consolidation, home renovations, or other big expenses, the pros of leveraging low-rate financing through home equity outweigh the cons.
Common Home Equity Loan Uses
Some of the most popular uses for home equity loan funds include:
- Debt consolidation – Pay off higher interest credit cards, personal loans, etc.
- Home improvements – Finance major remodels, repairs and upgrades
- College tuition – Cover education costs for yourself or dependents
- Medical bills – Pay large unpaid medical expenses
- Life events – Finance weddings, adoption costs, family emergencies
- Business expenses – Access capital for a business startup or expansion
- Investing – Use cash to invest in rental properties, stocks, etc.
- Vehicle purchase – Buy a new or used car, truck, boat, RV, etc.
A home equity loan provides an opportunity to check off big financial goals and important life priorities. Just be sure to borrow only what you can reasonably afford to repay.
Tips for Getting the Lowest Rate with Bad Credit
While your credit score is a big factor, taking these steps can potentially help you land the lowest rate possible:
- Shop with multiple lenders to create competition
- Opt for a shorter repayment term like 10 or 15 years
- Make a larger down payment if you can
- Bring in a co-signer with better credit
- Take out a smaller loan amount
- Put up an asset as additional collateral
- Show consistent income and a lower DTI
Even gaining small improvements in your credit or financial profile can mean big savings on interest costs over the loan repayment period.
Is a Home Equity Loan Right for You?
Despite having credit challenges, a home equity loan can still be a smart financing option that opens the door to borrowing at better rates than high-interest credit cards or personal loans. Weigh the pros and cons carefully for your situation.
Be realistic about repayment and tap only what you need to achieve
Pros and cons of getting a home equity loan with bad credit
Getting a home equity loan with bad credit has its benefits and drawbacks. You can tap your equity to help with expenses, but it’s also risky.
- You’ll pay a fixed rate: Home equity loans are for a fixed sum at a fixed interest rate, so you’ll know exactly how much your payment is each month. This can help you budget for and reliably pay down debt, which can help boost your credit score.
- You could get out of costlier debt: If you have high-interest debt — like credit card debt — you could pay it off with a lower-rate home equity loan, then repay that loan, with one payment, for less.
- You’re taking on more debt: If you’ve had trouble managing money in the past, it might not be wise to take on more debt with a home equity loan, even if you qualify.
- It’ll be more expensive: A lower credit score won’t qualify you for the best home equity loan rates, meaning you’ll pay more in interest.
- You could lose your home: If you fall behind on loan payments, you’ll further damage your credit. Even worse: If you’re eventually unable to pay back the loan, your home could go into foreclosure.
Learn more:
What are “good” and “bad” scores for home equity loans?
First, let’s define our terms. Here’s how FICO — the most popular credit scoring model — categorizes different scores:
Score |
Classification |
|---|---|
| Source: MyFico.com | |
| 300-579 | Poor |
| 580-669 | Fair |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-850 | Excellent |
When it comes to home equity loans, lenders set a high bar for creditworthiness — higher, even, than mortgages. That’s because they are considered riskier than mortgages: You, the applicant, are already carrying a big debt load. Should you default and your home get seized, the home equity loan — as a “second lien” — only gets paid after the primary (the original) mortgage.
Furthermore, home equity loans don’t have government backing, like some mortgages do (though in April, government-sponsored enterprise Freddie Mac proposed the idea of it creating such loans). The lender bears all the risk.
So home equity lenders set stricter criteria, demanding scores squarely in the “fair” range. A score in the 500s – good enough for an FHA mortgage — will have a tough time qualifying for a home equity loan. Some lenders have loosened their standards of late and are approving applicants with scores as low as 620. But a “good” score, preferably above 700, remains the threshold for many institutions. It can vary even within one lender, depending on factors like the loan amount or other loan terms.
And of course — as with any loan — the lower your credit score, the less likely you will qualify for the best interest rates.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
Can you get a home equity loan with bad credit in Texas?
Can I get a home equity loan with a 500 credit score?
What is the lowest credit score to get a home equity line of credit?
What disqualifies you from getting a home equity loan?
How do I find the best home equity loan rates in Texas?
These tips can help you find the best home equity loan rates in Texas: Check your credit score: Typically, the higher your credit score is, the more likely you are to receive lower interest rate offers from lenders. You can also try to improve your credit score by paying off existing debts and staying current with your monthly payments.
Can I borrow from my home equity if I live in Texas?
Three options to consider when you live in Texas and want to borrow from your home equity include traditional home equity loans, home equity lines of credit (HELOC), and cash out refinances. As you research to decide what may work best for you, please note that Discover® offers home equity loans and refinance options, but does not offer HELOCs.
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 loan with bad credit?
You can estimate this by getting a home value assessment or appraisal. The more equity you have, the better your chances of qualifying for a loan, even with bad credit. Generally, lenders let you borrow up to 80% of the equity in your home. This limit is known as the maximum loan-to-value (LTV) ratio.