How to Get Approved for a Home Equity Loan With a Fair Credit Score

A low credit score can make it hard to get a home equity loan. But that doesn’t mean you don’t have options.

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Home equity loans let you turn your equity into cash, which you can use to pay for home improvements, unexpected medical expenses, or any other bills you might be facing.

Generally, lenders require at least a 620 credit score to qualify for a home equity loan. If your score isn’t quite there yet, though, you still have options.

Getting approved for a home equity loan when you have less-than-perfect credit can feel like an uphill battle. But having a credit score in the fair range (usually considered 620-669) doesn’t necessarily mean you’ll be denied. With the right strategy and preparation you can improve your chances of qualifying for a home equity loan.

As the founder of this personal finance blog, I’ve helped many readers understand credit and lending In this comprehensive guide, I’ll walk through exactly what it takes to get a home equity loan approved with a fair credit score based on the latest industry standards and expert insights

What Credit Score Do You Need for a Home Equity Loan?

While requirements vary between lenders, most look for a minimum credit score of around 620 to qualify for a home equity loan. The better your score, the lower interest rate you can expect to receive.

Here’s a quick rundown of credit score tiers according to FICO, the most widely used scoring model:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800-850: Excellent

So if your score falls in the fair range, you can potentially get approved, albeit likely at a higher interest rate. Every lender has their own criteria though, so it pays to check individual requirements.

What Else Do Lenders Look For?

Your credit score isn’t the only factor lenders consider when approving home equity loans. Here are some other key qualifications:

  • Equity: Most lenders require at least 15-20% equity in your home. This refers to the current market value minus any mortgage debt.

  • Debt-to-Income (DTI) Ratio: Your total monthly debt divided by gross monthly income. Aim for 43% DTI or less.

  • Loan-to-Value (LTV) Ratio: The loan amount divided by your home’s value. Lower is better for approval odds.

  • Payment History: On-time mortgage payments help demonstrate you can handle debt responsibly.

  • Income/Employment: Proof of stable income from employment or other sources.

Meeting these benchmarks in addition to having a fair credit score can offset some risk in the lender’s eyes and improve your chances of getting approved.

Strategies to Get Approved With Fair Credit

If your credit score falls short of excellent, don’t lose hope. Here are some tips to boost your approval odds for a home equity loan:

1. Check your credit reports

Pull your credit reports from AnnualCreditReport.com and dispute any errors you find. This can give your score a quick boost.

2. Pay down existing debts

Reducing your credit card balances and other debts will immediately improve your DTI ratio.

3. Get a cosigner

Ask a family member or friend with excellent credit to cosign your home equity loan application. Their income and score get factored in by lenders.

4. Write an explanatory letter

Draft a letter explaining the context behind any dings on your credit report to show lenders you’re working to improve.

5. Apply with an existing lender

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

6. Shop around

Compare options from multiple lenders to find the most favorable terms for your situation. Credit unions often have more flexibility.

7. Make a large down payment

Putting down 20% or more can help overcome fair credit by lowering the LTV ratio.

With the right preparation and persistence, getting approved for a home equity loan in the fair credit range is very possible. Don’t get discouraged if your first application gets denied – try implementing some of the above tactics to improve your next attempt.

Home Equity Loan Lenders to Consider

I always recommend shopping around between multiple lenders when applying for a home equity loan to find the best fit. Here are a few top lenders known for working with fair credit borrowers:

  • Figure: Minimum 640 credit score, up to 90% LTV ratio
  • Guaranteed Rate: Minimum 620 credit score, up to 95% LTV ratio
  • Connexus Credit Union: Minimum 640 credit score, up to 90% LTV ratio
  • Navy Federal Credit Union: Minimum 620 credit score, up to 100% LTV ratio

As you can see, credit unions tend to offer more flexible approval standards. I’d start your search there.

The Pros and Cons of Home Equity Loans

Like any financial product, home equity loans come with some tradeoffs. As you weigh your lending options, be sure to consider both the potential benefits and drawbacks:

Pros

  • Access lump sum cash from your home’s equity
  • Typically lower interest rates than credit cards or personal loans
  • Fixed monthly payment amounts
  • Interest may be tax deductible

Cons

  • Closing costs reduce amount available to borrow
  • Monthly payments raise housing costs
  • Missed payments damage credit and can lead to foreclosure
  • Not dischargeable in bankruptcy

For many homeowners, the pros outweigh the cons when used responsibly. But it’s smart to go in with eyes wide open.

Alternatives if Denied for a Home Equity Loan

If your home equity loan application gets rejected, don’t panic. You still have options, including:

  • Personal loans – Unsecured lump sum loans from online lenders like Upstart and SoFi

  • Credit cards – High interest rates but fast access to credit

  • 401k loan – Borrow against your retirement savings (with risks)

  • Cash-out mortgage refinance – Refi into a larger loan to pull cash out

  • Debt management plan – Work with a nonprofit credit counselor to consolidate debt

I recommend exhausting all options before resorting to high-interest products like payday loans or auto title loans. And be sure to address any credit issues identified by lenders so you’re better positioned next time.

Final Tips for Getting Approved

As we wrap up this guide, here are a few final tips to remember when seeking a home equity loan with fair credit:

  • Shop lenders that advertise bad credit options
  • Come prepared with income proof, equity documentation, and context for any credit blips
  • Be realistic with your requested loan amount based on your financial profile
  • Consider adding a co-signer or putting down a larger down payment
  • Highlight stable employment and any assets you can use as collateral

With proper preparation and persistence, getting approved is very possible even if your credit score isn’t perfect. Don’t get discouraged by any initial rejections. Implement the strategies above and keep applying until you find a lender willing to work with you.

Find out your debt-to-income ratio

Lenders will also consider your debt-to-income ratio when you apply for a home equity loan. This indicates how much of your monthly income goes toward paying off debt.

How to calculate DTI: Add up your monthly bills and loan/credit card payments, and divide the total by your monthly income. Multiply that amount by 100.

For example, if you have $2,000 in debt payments and make $6,000 per month, your DTI would be 33% ($2,000 / $6,000 x 100).

Most lenders want a DTI of 43% or lower. A low DTI can help improve your chances of getting a loan, especially if you have a lower credit score since it indicates less risk for the borrower.

Check your credit and try to improve it

To start, head to AnnualCreditReport.com and pull your credit. You get one free report from all three credit bureaus per year.

Once you have your credit report, check it for errors and evidence of identity theft, such as accounts you don’t recognize and credit cards that aren’t yours. Reporting these to the credit bureau can help improve your score. So take these steps:

  • Pay all your bills on time: Payment history — or your track record of payments — accounts for 35% of your score, so make it a point to pay all of your bills on time, every time.
  • Pay down your debts: Lenders want to see a credit utilization rate of 30% or less — meaning your balances account for 30% or less than your total available credit.
  • Keep credit cards open: How long your accounts have been open impacts 15% of your credit score, so avoid closing accounts — even once you’ve paid them off.
  • Avoid applying for new cards: This will result in hard credit inquiries, which can hurt your score.

Learn More: How Your Credit Score Impacts Mortgage Rates

About Home Equity Loans for People With Bad Credit

FAQ

Can I get a home equity loan with a 600 credit score?

If you have bad credit, which generally means a score less than 580, you probably won’t qualify for a home equity loan. Many lenders require a minimum credit score of 620 to qualify for a home equity loan. However, to receive good terms, you should aim to have a credit score of 700 or higher.

What is the lowest credit score to get a home equity loan?

Requirements for home equity loans Typical requirements for home equity loan applicants include: A minimum credit score of 620. At least 15 percent to 20 percent equity in your home. A maximum debt-to-income (DTI) ratio of 43 percent, or up to 50 percent in some cases.

Can I get a home equity loan with a 620 credit score?

If your score is lower than 620, this could make it difficult to qualify for a home equity loan with many lenders. Calculate your debt-to-income ratio. This is the amount of monthly debts you’re obligated to pay, relative to your monthly income.

Can you get a HELOC with a 580 credit score?

Poor credit doesn’t automatically result in HELOC denial, but it does lead to higher interest rates and stricter loan terms. Many HELOC lenders require credit scores above 680, although some accommodate individuals with fair scores ranging from 580 to 660.

Should you get a home equity loan with a high credit score?

Individuals with higher credit scores often benefit from lower interest rates. If you want to obtain a home equity loan, a higher credit score will give you more flexibility on terms. For example, higher scores may allow you to access more of your equity.

What is a good credit score for a home equity loan?

A **good credit score** is essential when applying for a **home equity loan**.Lenders generally look for a credit score of at least **700** to approve such loans.However, having a **higher credit score**

Can you get a home equity loan with bad credit?

Some home equity lenders allow for FICO scores in the “fair” range (the lower 600s) as long as you meet other requirements around debt, equity and income. That’s not to say it’ll be easy: Lenders tend to be stringent, even more so than they are with mortgages. Still, it’s not impossible. Here’s how to get a home equity loan (even) with bad credit.

How do I qualify for a home equity loan?

Like with most loans, you’ll need good to excellent credit (a credit score of at least 680) as well as a stable income and a low debt-to-income (DTI) ratio to qualify. Determine how much home equity you have. You must have enough equity in your home—typically at least 20%—to be eligible for a home equity loan.

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