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How To Get A Home Equity Loan With Bad Credit: A Guide

Apr 9, 2024



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?

You need decent credit in order to get a home equity loan. 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.

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.

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How To Get A Home Equity Loan With Bad Credit: 5 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 at securing a home equity loan with an unfavorable credit score.

1. Check Your Credit Score

Before applying for a home equity loan, you’ll likely want to 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 more favorable 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.

Equifax®, Experian™ and TransUnion® each have a credit file on Americans who’ve applied for a loan or line of credit. Once per year, you can get your credit report from all three credit bureaus through AnnualCreditReport.com for free. By checking your credit report, you may be able to find errors that affect your score. By finding and requesting removal of these errors, you could help increase your credit score.

2. Clean Up Your Credit Report

Some of the most common credit report errors include misspelled names, account reporting mistakes (such as inaccurate missed or late payment dates) and other incorrect account or personal information.

If you find information on any of your credit reports that is incorrect or outdated, it’s important to dispute it. Removing negative items that shouldn’t be showing up on your credit report is one of the quickest ways 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 necessary 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.

If you’re considering a home equity loan, you’ll want to determine how much equity you need to access in order to accomplish your goals. Let’s do some quick math and show you how this works.

Home Equity Calculations: An Example

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).

Before applying for a home equity loan, you might want to ask yourself: How much equity can you access? And will the amount you can take out help you accomplish your ultimate financial goals? Consider these questions when determining whether a home equity loan is right for you.

5. 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.

In order to verify your income and assets to qualify for the loan, your lender may ask to see a variety of documents, including but not limited to the following:

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

The more of this 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, who may be required to provide other documentation .

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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.

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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 you would 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, it’s also worth looking into your options again after your score has improved.

Secure A Co-Signer

The benefit of having a co-signer is that you can add another person’s income to your application. This could be very beneficial, particularly if they have a low level of existing debt. Your combined income could create a lower DTI, which can have a direct impact on the amount you qualify for.

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. So, the minimum must be at least a median 680 FICO® Score.

Consider Other Loan Options

If you have a low credit score and need the money more quickly, you may have to 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 obligations are 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.

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.

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 and that you’ll have to pay closing costs, which you wouldn’t have to pay with a personal loan.

The Bottom Line

While getting a home equity loan with 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 apply 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 LTV/CLTV/HCLTV. Requirements are tiered as follows: 680 minimum FICO® with a max LTV/CLTV/HCLTV of 75%, 700 minimum FICO® with a max LTV/CLTV/HCLTV of 85%, and 760 minimum FICO® with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 45% or below. Valid for loan amounts between $45,000.00 and $350,000.00 (minimum loan amount for properties located in Iowa is $61,000). Product is a second standalone lien and may not be used for piggyback transactions. To qualify for these loan programs, you must be the age of majority in your state with a valid U.S. residency. 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. Formal approval will be subject to satisfactory verification of income, assets, credit, property condition and value. Additional restrictions apply. Not available in Texas.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage he freelanced for various newspapers in the Metro Detroit area.