How to get a home equity loan with bad credit: A guide

Are you interested in accessing your equity to make home renovations or accomplish a financial goal like paying down high interest debt?

 A home equity loan could allow you to take advantage of the equity you’ve built in your home at a relatively low interest rate. But what do you do if your credit score is less than stellar?

Let’s discuss the dynamics of getting a home equity loan if you have bad credit.

Can you get a home equity loan with bad credit?

Yes, it’s possible. Some lenders only require a score of 620 to secure a home equity loan with bad credit.

However, lower credit scores also typically correspond with higher interest rates on loans, including home equity loans. If you take the time to improve your score, you have the opportunity to secure a better rate when you apply for the loan.

Some ways to improve your low credit score include:

• Pay bills on time
• Reduce credit card balances
• Become an authorized user
• Dispute errors on your credit report
• Report rent payments using a credit reporting service
• Open a secured credit card
• Keep old accounts open
• Limit new credit applications

The process is very similar to applying for a primary mortgage. Rocket Mortgage^® usually requires a median FICO^® Score of at least 680¹ to qualify for a home equity loan. Other home equity lenders may have higher or lower credit requirements depending on their specific standards.

How to get a home equity loan with bad credit: 6 tips

While it can be more difficult to qualify for a home equity loan with bad credit, it’s not impossible. Here are some things you can do to improve your chances of securing a home equity loan with an low credit score.

1. Check your credit score

Before applying for a home equity loan, check your credit score–especially if it’s on the lower side. It’s important to know your credit score in advance because The higher your score, the better you can expect your loan terms to be.

There are many online options you can use to get your score for free. You can check with your bank to see if they also have a free tool.

Alternatively, several credit reporting agencies may have this information:

• Equifax^®
• Experian™
• TransUnion^®

Each have a credit file on Americans who’ve applied for a loan or line of credit. Once per month, you can get your credit report from all three credit bureaus through annualcreditreport.com for free.

By checking your credit report, you might find errors that affect your score. By finding and requesting the removal of these errors, you could help your credit score.

Credit score ranges

Credit scores range from 300 to 850, though the average credit score throughout 2024 was in the low 700s. Here is the breakdown of what scores fall into which brackets:

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

2. Clean up your credit report

There are common credit report errors. Some include:

• Misspelled names
• Incorrect information on companies you’ve repaid
• Personal information
• Account reporting mistakes (like late payment dates)

If you find information on any of your credit reports that is incorrect or outdated, you can dispute it. You can report misinformation through the Consumer Financial Protection Bureau.

Removing negative items that shouldn’t be showing up on your credit report is a quick way to raise your score.

3. Calculate your debt-to-income ratio

Debt-to-income ratio (DTI) is one of the most important factors for any loan. If you want to get a home equity loan, it’s helpful to understand what DTI is and how it’s calculated.

DTI looks at how much of your monthly pretax income goes toward paying off debt. To calculate your DTI, you’ll add your monthly installment debts like car payments, mortgages, and student loans along with the minimum monthly payment on revolving debt, like credit cards. Then, you’ll divide this amount by your gross monthly income. Here’s the formula:

(Installment Debt + Revolving Debt) ? Gross Monthly Income = DTI

The less debt you have before getting your home equity loan, the more you could potentially take out, assuming you have enough equity. Keeping a low DTI could also help you if you’re on the edge of approval.

4. Determine your available equity

Home equity is the difference between the value of your home and the remaining mortgage balance or balances you still owe a lender. A home equity loan is often taken out as a second mortgage, so you’ll have two separate monthly mortgage payments.

Considering a home equity loan? You’ll want to determine how much equity you need to access to accomplish your goals.

Let’s do some quick math and show you how this works. If you have a $300,000 mortgage balance and your house is worth $500,000, you have $200,000 worth of equity.

5. Estimate your Loan-To-Value ratio (LTV)

For borrowers with a credit score from 680-699, Rocket Mortgage will allow you to take out up to 80% of your home‘s appraised value.

Using our example above, 80% of the home value would be equal to $400,000 (0.8 ? $500,000). Your maximum loan amount is the total amount of equity you could access minus your existing mortgage balance. With this example, you could potentially get a $100,000 home equity loan ($400,000 − $300,000).

6. Organize your financial records

When applying for any loan, keeping organized financial records can make life easier – especially if you have poor credit but a solid income. Lenders may be more willing to work with you if you can demonstrate a stable financial situation.

Your lender may ask to verify your income and assets to qualify for the loan. Your lender may ask to see a variety of documents like:

• Pay stubs
• W-2s
• Bank and financial statements
• Tax returns

The more information you can gather in advance, the easier your application process will be. This documentation can be particularly helpful for those who are self-employed.

Should you get a home equity loan or a HELOC?

A home equity loan and a home equity line of credit (HELOC) are both methods of accessing the equity in your home. With a home equity loan, you get the funds in one lump sum payment all at once. With a HELOC, there are two distinct periods—the draw period and the repayment period. Rocket Mortgage doesn’t offer HELOCs at this time.

HELOC draw period

During the draw period, you can take money out of your line of credit. However, like a credit card, you’re only responsible for making the minimum payment on whatever you’ve taken out. You can also put the money back into the line of credit so that you can access it again like a credit card. Once this phase is over, you enter the repayment period.

HELOC repayment period

During repayment, you pay off both the principal and interest so that you can take care of the full balance. On a 30-year HELOC, the draw period might be the first 10 years and the repayment period might last 20.

Although a HELOC provides a certain amount of funding flexibility, there are also downsides. Some HELOCs require large lump-sum balloon payments at the end of the loan term. Additionally, they often come with adjustable or even variable rates. With a home equity loan, you typically have the option of a fixed payment.

Explore your options for home equity loans with bad credit

Here’s what you need to know if you’re in the market for a home equity loan.

Shop around for interest rates

Lenders have different policies and levels of appetite for risk. So, you might find that you get a different rate from an online lender like Rocket Mortgage or a local credit union than from a traditional bank.

It will be doubly important to put effort into shopping if your credit isn’t great because your options may be more limited. However, if you’ve spent a while working on your credit, try again when it’s improved.

Secure a co-signer

Having a co-signer lets you add their income to your application, potentially lowering your debt-to-income (DTI) ratio. If they gave little debt, it could make you eligible for a larger amount.

It’s important to note that you and your cosigner must both have fairly good credit because the lowest median credit score of all clients on the loan is the one that counts for qualification purposes.

Consider other loan options

If you have a low credit score and need the money more quickly, you can consider other types of loans. A personal loan could be an option, although the rate will be higher because it’s not secured by your home.

What to expect with a new home equity loan

If you take out a home equity loan, you’ll get the funds you were approved for in one big payment. After that, you can use the funds for whatever you want, like home improvements or debt consolidation. Your only obligation is to make the monthly loan payments.

The term of the loan will vary based on the lender, but Rocket Mortgage offers 10- or 20-year terms. There’s no penalty for paying the loan off early. Once the loan is paid off, the lien on your house will be removed as it is when you pay off the primary mortgage.

Home equity loan with poor credit: FAQs

Let’s take a look at some of the frequently asked questions about obtaining a home equity loan with bad credit.

How do I handle a home equity loan denial?

If you’ve been rejected for a home equity loan due to bad credit, you have some options. Working to improve your credit score doesn’t happen overnight, but you can focus on getting your score up before applying again. If you need the loan sooner, you can get a co-signer with a higher credit score. You could also try writing a letter of explanation to your lender to clarify why your credit score is what it is, especially if there are extenuating circumstances. If none of these are options for you, you can look into getting a personal loan.

What credit score is required to get a home equity loan?

The minimum required credit score for a home equity loan will vary depending on the lender. However, you typically need decent credit to qualify. For example, Rocket Mortgage has a median credit score requirement of at least 680.

What are some alternatives to getting a home equity loan?

Alternatives to a home equity loan include getting a HELOC or a cash-out refinance. Just like with home equity loans, you’ll have to meet specific lender requirements to obtain these financing options. But you still might be able to refinance with a low credit score.

What are some of the pros and cons of a home equity loan?

Home equity loans often come with a fixed interest rate, while other financing options (like a HELOC) typically have variable rates. Additionally, there aren’t restrictions on how you use the funds, and you have immediate access to those funds in a lump sum.

Some disadvantages include the fact that you’ll have a second mortgage to pay off. You’ll also have to pay closing costs, which you wouldn’t have to pay with a personal loan.

The bottom line: Good credit goes a long way

While getting a home equity loan if you have poor credit isn’t easy, you also shouldn’t see it as a forever uphill battle. By cleaning up mistakes on your credit report, keeping an eye on your credit score, and paying off debt, you can begin to put yourself in a better position for qualification.

When you’re ready, you can start an application for our Home Equity Loan or discuss your financing options with one of our Home Loan Experts at (833) 326-6018.

1 Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher-priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.