How to Get an Equity Loan With Bad Credit

Getting approved for an equity loan when you have bad credit can seem daunting. Your credit score plays a big role in whether a lender will approve you, and the interest rate and fees you’ll pay. But having less-than-stellar credit doesn’t necessarily mean you can’t tap into your home equity.

In this comprehensive guide we’ll walk through how to get an equity loan if your credit score isn’t great. Here’s what we’ll cover

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

Before applying for a home equity loan or line of credit, it’s wise to check your credit score so you know where you stand. Most lenders prefer borrowers to have a credit score of 680 or higher. This is generally considered a “good” credit score.

Here’s how the main credit scoring company FICO categorizes different score ranges:

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

As you can see you can potentially get approved for a home equity loan with a “fair” credit score in the low 600s. But the lower your score the higher interest rate and fees you’ll likely pay.

If your credit score is below 580, your chances of approval drop significantly. Though not impossible, you’ll need to take extra steps to boost your chances which we’ll cover next.

4 Tips for Getting Approved with Bad Credit

If your credit score is on the lower side, here are some strategies to improve your chances of getting approved for a home equity loan:

1. Add a Co-Signer

Bringing on a co-signer with good credit is one of the best ways to offset your own poor credit A co-signer agrees to be responsible for repaying the loan if you can’t This gives the lender more assurance that the loan will be repaid on time,

Just keep in mind, if you default it could negatively impact their credit as well as strain your relationship. Make sure you and your co-signer fully understand the risks involved before moving forward.

2. Apply with an Existing Lender

Applying for an equity loan with a lender you already have a relationship with can help your chances. For example, if you do your banking and have a mortgage with Wells Fargo, applying for a home equity loan through them means they already have knowledge of your financial history. Local banks and credit unions may also be more flexible than large national lenders.

3. Improve Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio measures how much of your gross monthly income goes toward paying debts. Most lenders want to see your DTI at 43% or less when approving a home equity loan. The lower your DTI, the better your chances with damaged credit.

Consider paying down some balances or consolidating high-interest debts to lower your DTI before applying. Our DTI calculator can help determine yours.

4. Build Up Home Equity

Lenders also consider your loan-to-value (LTV) ratio when approving a home equity loan. This compares your mortgage balance to the appraised value of your home. Most lenders require an LTV of 80% or less.

If your LTV is higher, make extra mortgage payments to build equity before applying. Waiting to apply until you have at least 20% home equity can significantly boost your chances of approval.

Finding a Lender Willing to Work With Bad Credit

Searching online is your best bet for finding lenders willing to work with poor credit borrowers. Here are some places to look:

• Online lenders: Online lenders tend to have lower overhead costs compared to brick-and-mortar banks. They pass those savings on through lower rates and more flexible approval requirements in some cases.

• Credit unions: Local credit unions are member-owned nonprofits, rather than for-profit banks. Their mandate is to serve members, not make money. Credit union eligibility is based on location, employer, or association membership. If you qualify to join one, it can be an excellent place to apply for an equity loan with bad credit.

• Mortgage lenders: Some mortgage lenders also offer home equity loan products. They may be willing to extend more flexibility since your home serves as collateral.

• Peer-to-peer lending: Newer peer-to-peer lending networks like LendingClub allow individual investors to fund loans. Investors get higher returns while borrowers can sometimes access better rates than traditional banks. Requirements vary by lender.

No matter where you apply, shop around and compare offers from multiple lenders. The lower rate you can qualify for, the more money you’ll save.

Alternatives if You Can’t Get Approved

If you’ve tried the strategies above but still can’t get approved for an equity loan, here are a few alternatives to consider:

• Personal loans: Personal loans are easier to qualify for than home equity loans, but come with higher interest rates. They also aren’t secured by your home, meaning there’s less risk to you if you default.

• Debt consolidation: Credit counseling agencies can negotiate with your creditors to consolidate debts into one lower monthly payment. This can reduce interest rates and fees. Borrowers with credit scores as low as 580 may qualify for a debt management plan.

• Cash-out mortgage refinance: If you have sufficient equity, doing a cash-out refinance could allow you to tap equity and potentially lower your mortgage rate at the same time. Requirements are similar to a home equity loan.

• 401(k) or retirement plan loan: Borrowing against a 401(k) or other retirement savings avoids credit checks and could provide lower interest rates. Just beware of losing retirement savings if you leave your job or fail to repay the loan.

• Borrowing from friends/family: As a last resort, asking trusted friends or family for a loan may be an option. Just be sure to put any agreements in writing and make repayment a top priority. Failing to repay could severely damage relationships.

Tips for Improving Your Credit

Whether you end up getting approved or need to look at alternative options for now, continue working to improve your credit. Here are some tips:

• Review your credit reports regularly and dispute any errors you find. Mistakes can drag down your score.

• Pay all bills on time each month. Setting up automatic payments can help.

• Keep credit card balances low. High balances close to your limits can lower your score.

• Don’t close old credit cards as it can shorten your length of credit history.

• Limit new credit inquiries by only applying for what you need. Too many hard inquiries can indicate higher risk.

• Build savings for emergencies and unexpected expenses so you avoid relying on credit.

With time and diligent credit management, your score will rebound. In as little as 6 months to a year you could see significant improvement.

The Bottom Line

A low credit score makes getting an equity loan more difficult but not necessarily impossible. Home equity loans are less risky for lenders than other loan types since your home acts as collateral. This means they may be willing to work with borrowers with less-than-ideal credit if other factors, like your DTI and home equity, are strong.

If your credit score is below 580, seriously look at alternatives like borrowing from retirement, friends, or taking out a personal loan. Then get to work on improving your credit so more options are available next time you need financing. With consistent attention to credit management, you can rebuild your score and open up more affordable borrowing options.