Bad credit home equity loan options and lenders

A home equity loan can be a convenient way of accessing funds for a variety of needs, such as renovating your house, starting a business, or paying for a child’s college tuition. However, in most cases, you’ll need a credit score of 620 or higher in order to qualify for a home equity loan. Without the right credit score, obtaining a home equity loan can be challenging.

Luckily, you still have a lot of options if your credit score could still use some work. Many financial institutions are willing to work with borrowers who have less-than-ideal credit scores. We’ll also discuss what you need to know about qualifying for a home equity loan with bad credit, as well as financing alternatives for homeowners who don’t think a home equity loan is the right fit.

The challenges of getting a home equity loan with bad credit

A lower credit score may affect your home equity loan options in a few ways:

• Limited selection: Fewer lenders offer financing to borrowers with poor credit. Most lenders consider borrowers with low credit scores as high risk. 
• Higher loan costs: Lenders often charge higher interest rates and additional fees to compensate for the bigger risk they’re taking on you, which increases the cost of borrowing. 
• Smaller loan amounts: Lenders tend to approve smaller amounts for borrowers with bad credit. This often reduces the amount of equity borrowers can access, even if they have a substantial amount of equity available.

These factors can make the process more challenging, but not impossible. Understanding what lenders look for—and exploring alternatives—can help you find an option that fits your circumstances.

Banks that give home equity loans with bad credit

Considering these challenges, the best course of action would be to work with lenders that offer home equity loans to borrowers with bad credit. Below is a list of lenders that may provide bad-credit home equity loans, depending on your circumstances.

• BMO Harris Bank
• TD Bank
• U.S. Bank
• Fifth Third Bank
• Bank Of America
• FourLeaf Federal Credit Union
• Connexus Credit Union
• Figure
• Spring EQ
• LoanDepot

How to compare your options

When comparing low credit lenders, it’s a good idea to compare the following aspects of a home equity loan:

Interest rates

Borrowers with poor credit often get approved for financing products at high interest rates. Shop around before committing to one lender. Some lenders offer fixed-rate loans, while others provide variable-rate options. 

Loan terms & repayment schedule

To prevent further damage to their credit, borrowers with low credit scores should seek out and maintain a realistic repayment schedule. Carefully review loan terms to make sure there are no penalties for early repayment. 

Loan structure

It’s not uncommon to see home equity lines of credit (HELOCs) that function similarly to a home equity loan. Rather than having an open door to borrowing whenever you want, like with a HELOC, these hybrid options function more like a series of staggered loans.

You’ll draw 100% of the full amount each time and pay it back through structured payments, as with a loan. But instead of needing to reapply every time you need funding, these products offer you an open window to borrow additional lump-sum funds as you need them during the draw period. 

Financing costs

Each lender decides how much they charge borrowers for applications, loan origination, closing costs, and other fees. Some lenders offer competitive rates but high fees, while others offer low fees but high rates.

However, if you focus on the APR when shopping around, instead of rates or fees individually, you’ll get a better apples-to-apples comparison between lenders. That’s because the APR rolls all of the loan costs together into one easy-to-compare number.

Loan amounts 

Another important factor to assess is the amount a lender will approve you for. Lenders that work with borrowers with bad credit often limit the amount of home equity a borrower can tap into. 

Lender reputation

Lastly, borrowers should evaluate a lender’s reputation, especially if the lender hasn’t been around for long. Check reviews and recommendations from other borrowers to make sure the lender is dependable.

Financing alternatives to consider

A home equity loan may not be the best option for you if you have poor credit, distrust online lenders, or need a more flexible funding solution. Luckily, there are several alternative financing options homeowners can consider.

Home equity investment

Best for low-credit score, low income, or self-employed borrowers

Pros

• Assumable by heirs
• No monthly payments
• Second properties may be eligible
• Easier credit and income qualification

Cons

• Payment due in 30 years as a lump sum
• Limitations on availability and eligible home types
• Financing cost depends on final home appreciation in value

A home equity investment (HEI) from Point can be a great alternative to taking out a lump-sum loan. Homeowners have up to 30 years to repay the amount they borrowed, along with a share of their home’s future growth in value (i.e., its appreciation).

HELOC

Best for flexibility

Pros

• Only pay interest on cash you borrow
• Interest-only payments during draw period
• Borrow only what you need, when you need it
• Tax-deductible interest if you use funds for home upgrades

Cons

• Variable interest rates
• Overspending temptation
• Foreclosure risk if you default
• Must pass credit and income check
• Minimum payment can fluctuate a lot over time

A HELOC is a revolving line of credit that is divided into a draw period (which lasts 5-10 years) and a repayment period (which lasts 10-20 years). It’s best for homeowners who prefer to withdraw money over an extended period of time. 

Cash-out refinance

Best for homeowners who can secure a better mortgage rate

Pros

• Opportunity to reset your mortgage
• Tax-deductible interest if you use funds for home upgrades

Cons

• Foreclosure risk if you default
• Must pass credit and income check
• Can be more expensive over the life of the loan

A cash-out refinance allows you to replace your existing mortgage with a new, larger one and gives you the difference in cash. You can use the funds for various purposes, such as home improvements, debt consolidation, or other major expenses. 

Reverse mortgage

Best for no monthly payments

Pros

• No monthly payments
• Some protections and benefits for spouse and heirs
• Cash available as a line of credit, lump sum, or monthly installments

Cons

• Must be 62 or older
• Expensive interest rates and fees
• Must have substantial equity or own your home outright

Unlike a traditional mortgage, where you make payments to the lender, with a reverse mortgage, the lender makes payments to you. The loan is repaid when the homeowner sells the home, moves out permanently, or passes away. 

Personal loans

Best for homeowners with limited equity

Pros

• Predictable payments
• Quick funding timelines
• Doesn’t lower your home equity
• No foreclosure risk if you default

Cons

• Higher interest rates
• Smaller loan amounts
• Must pass credit and income check

Homeowners who don’t have enough equity to qualify for a home equity financing product may want to consider a personal loan. Personal loans can be used for a variety of purposes and don’t require borrowers to put their homes up as collateral. 

401(k) hardship withdrawals: 

Best for borrowers with an immediate need

Pros

• No credit check
• Doesn’t create a debt
• No repayment required

Cons

• Not all hardships qualify
• Lose out on investment gains
• Pay taxes on withdrawn amount
• Pay penalties on withdrawn amount if you’re under age 59.5

Hardship withdrawals allow you to tap into 401(k) funds, but only under certain conditions. To qualify, you must show strong and immediate financial need for medical, housing, or tuition expenses.

401(k) loans

Best for borrowers with additional retirement funds

Pros

• No credit check
• Low interest rate
• Pay interest to yourself
• Payments taken out of paycheck

Cons

• Lose out on investment gains
• Not all employers offer 401(k) loans
• Must repay balance in full if you quit or lose your job

A 401(k) loan allows 401(k) holders to borrow up to 50% of their vested balance with a maximum loan amount of $50,000. 

How to improve your chances of getting approved

The requirements for a home equity loan with bad credit may dissuade some borrowers from applying. However, there are many ways to increase your chances of approval.

• Check your credit reports: Review each of your three credit reports (Equifax, Experian, and TransUnion) for errors, and dispute any discrepancies. It’s not uncommon to have errors listed on your report, and that can unfairly lower your credit score. 
• Get prequalified: A lender will do a soft credit check that doesn’t impact your credit score. Using this information, the lender provides you with an estimated loan amount, interest rate, and terms. 
• Lower your DTI ratio: Lenders also consider your debt-to-income ratio when reviewing your application. If you can pay off some of your debts, and/or increase your income, you may have an easier time qualifying for a home equity loan. 
• Income size and stability: Having a high salary or multiple income streams makes you more attractive to lenders since you’re more likely to have funds available to make your payments.
• Boost equity: Greater equity in your home translates into greater security for lenders. Making home improvements that add value to your property, such as kitchen renovations or bathroom additions, or paying down your mortgage can all help grow your equity.
• Consider a co-signer: Bringing on a co-signer with good credit can improve your chances of getting approved, securing a lower interest rate, and obtaining more favorable loan terms. 

Applying for a home equity loan with bad credit

It can be hard to qualify for a home equity loan with bad credit, but it's not impossible. Credit score requirements are just one of many factors lenders consider when evaluating a home equity loan application. The amount of home equity you’ve accumulated and your monthly income can also impact your chances of approval. 

Luckily for borrowers, there are several things you can do to grow your home equity and increase your income. Prequalifying, lowering your DTI ratio, and disputing errors on your report can also position you as a more competitive borrower. However, if a home equity loan isn’t the right fit, you can always consider tapping into your home equity through a HELOC or HEI.