How to Get a Home Equity Loan With Bad Credit

Struggling with bad credit can make your financial goals feel out of reach, including securing a home equity loan. But the good news is that having less-than-perfect credit doesn’t automatically disqualify you from tapping into your home’s equity.

Lenders have different criteria, and some are willing to work with homeowners like you who might have a few credit dings. However, it’s important to know the steps to getting a home equity loan with bad credit.

In this guide, we’ll explain how to navigate the process and what you can do to boost your chances of approval.

Can you get a home equity loan with bad credit?

Yes, you can get a home equity loan with bad credit, but it’s more challenging. Lenders typically prefer borrowers with good to excellent credit because it indicates a lower risk. However, some lenders are open to working with those who have lower credit scores, especially if you have substantial equity in your home and a solid income.

Having bad credit might mean you’ll face higher interest rates or stricter terms. Lenders need to compensate for the increased risk they’re taking on, so they may set more stringent requirements.

Still, having bad credit doesn’t make it impossible — just be prepared for a potentially longer process and be willing to take some extra steps (we’ll list below) to show lenders you’re a good borrowing investment.

Home equity loan requirements

Even with bad credit, meeting certain requirements can improve your chances of getting approved for a home equity loan. Here’s what most lenders look for:

Sufficient home equity: Typically, you’ll need at least 15% to 20% equity in your home. The more equity you have, the lower the lender’s risk.
Reasonable debt-to-income ratio: Lenders prefer a debt-to-income (DTI) ratio of 43% or lower. This ratio shows how much of your monthly income goes toward debt payments.
Stable income and employment: Steady income and employment history are key qualifiers. Lenders need to see that you can repay the loan.
Acceptable loan-to-value ratio (LTV): Your LTV ratio should ideally be 80% or lower. This ratio compares your loan amount to the appraised value of your home.
Credit score: A credit score of at least 620 is typically needed for a home equity loan. A higher score can help you get better terms and interest rates. However, with the right lender and circumstances, a lower score can still get you in the door.

Credit score guide

Your credit score plays a big role in the home equity loan process. According to consumer credit reporting agency Equifax, credit scores range between 300 and 850. Scores within that range are broken into five categories, from excellent to poor. They include:

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

Here’s a quick guide to understanding how your score impacts your options:

620 and above: Most lenders require a minimum score of 620 for a home equity loan. Scores in this range might secure a loan with a competitive interest rate.
580 to 619: Some lenders may still work with you but expect higher interest rates. You may also need to have more equity in your home to qualify.
Below 580: It becomes significantly more difficult to get approved. You might need to look for specialized lenders or consider other alternatives.