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, without the right credit score, obtaining a home equity loan can be challenging.

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By FICO standards, a credit score below 580 is considered “poor,” 580 to 669 is considered “fair,” and 670 is considered “good.” Lenders are usually more inclined to approving borrowers with good credit scores than borrowers with fair or poor credit scores. 

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Luckily, there are financial institutions that are willing to work with borrowers who have less-than-ideal credit scores. In this blog, we’ll discuss what you need to know about qualifying for a home equity loan with bad credit and provide a list of the top 10 lenders offering bad-credit home equity loans. We’ll also discuss how to compare bad credit lenders and offer financing alternatives for homeowners who don’t think a home equity loan is the right fit.

Home equity loans with bad credit: An overview

When applying for a loan, borrowers with poor credit will need to be strong in certain areas. Having a high salary or multiple income streams makes you more attractive to lenders. Lowering the amount of debt you have could also strengthen your application. 

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You can also increase your chances of approval by working with a lender that specializes in bad credit loans. These types of lenders typically have more flexible criteria than traditional banks. They often use alternative data sources and unique algorithms to assess a borrower’s risk profile, allowing them to work with a wider range of borrowers and offer more favorable terms. 

Challenges of taking out a home equity loan with bad credit

Obtaining a home equity loan with bad credit comes with a few challenges. Firstly, few lenders offer financing to borrowers with poor credit. Most lenders consider borrowers with low credit scores as high risk. To compensate, these lenders often charge higher interest rates and additional fees, which increases the cost of borrowing. 

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Additionally, lenders tend to approve smaller amounts for borrowers with bad credit than borrowers with good credit. This often reduces the amount of equity borrowers can access, even if they have a substantial amount of equity available. 

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 five banks, two credit unions, and three online lenders that may provide bad-credit home equity loans.

• BMO Harris Bank
• TD Bank
• Discover Bank
• Fifth Third Bank
• Bank Of America
• Bethpage Federal Credit Union
• Connexus Credit Union
• Figure
• Spring EQ
• LoanDepot

How to compare your options

When comparing low credit lenders, borrowers should consider 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. 

Fees and closing costs

Each lender decides how much they charge borrowers for applications, loan origination, closing costs, and other fees. It’s important to include these fees in the cost of borrowing when comparing lenders. Some lenders offer competitive rates but high fees, while others offer low fees but high rates. 

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 and accessible throughout the life of your loan. 

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 

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A home equity investment (HEI) from Point can be a great financing solution for homeowners who have less-than-ideal credit. Instead of taking out a loan, homeowners receive a lump sum of cash in exchange for a portion of their home’s future equity. 

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In addition to a low credit requirement of 500 and no income requirements, homeowners enjoy no monthly payments and the flexibility to use the funds as needed. The HEI can be settled anytime within 30 years, or when the home is sold or refinanced. Before agreeing to an HEI, homeowners should consider how much equity they have and how an HEI will affect their home’s future appreciation. 

HELOC

Best for flexibility

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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. Interest rates on home equity lines of credit (HELOCs) are often variable, which means your payments could increase over time. However, you only pay back interest on the amount you withdraw, not necessarily the amount you’re approved for. 

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Borrowers usually need to have at least 15% equity in their home, a credit score of 620 or higher, and proof of stable income. Before getting a HELOC with bad credit, consider what you’ll be using the HELOC for and your ability to pay it back. Postponed repayment periods may make it easier to overspend.

Cash-out refinance

Best for homeowners who can secure a better mortgage rate

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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. The new loan may have different terms, such as a new interest rate or loan duration. 

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To qualify, lenders typically require a minimum credit score of around 620 or higher, at least 20% equity, and a DTI  below 43%. A cash-out refinance is only worth exploring if you can secure a better rate and term on your mortgage. 

Reverse mortgage

Best for no monthly payments

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A reverse mortgage helps homeowners aged 62 and older tap into their home equity for cash. 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. 

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To qualify for a reverse mortgage, you must be at least 62, own your home outright or have substantial equity, and continue living in it as your primary residence. You'll also need to meet with a HUD-approved counselor and demonstrate financial stability to cover property taxes, insurance, and maintenance costs. 

Personal loans

Best for homeowners with limited equity

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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. 

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The amount you qualify for will depend on several factors, including your credit score, income, and debt-to-income ratio. Since personal loans are unsecured, they may come with stricter requirements than HELOCs or home equity loans. 

401(k) hardship withdrawals: 

Best for borrowers with an immediate need 

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Hardship withdrawals also 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. Unlike 401(k) loans, hardship withdrawals don’t require repayment. However, they are subject to income taxes as well as penalties if you’re under 59.5 years old. 

401(k) loans

Best for borrowers with additional retirement funds

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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. These loans are usually repaid within five years via payroll deductions. Interest  on a 401(k) loan is usually fixed and is returned to the borrower’s account once the loan is paid back. Borrowers are often drawn to 401(k) loans because they come with lower interest rates than other loans and don’t require a credit check 

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.

Step 1: Check your credit report

Check for errors and dispute any discrepancies on your credit report Be sure to check with all three credit bureaus (Equifax, Experian, and TransUnion). . If you’re unsatisfied with your score, try boosting it by avoiding new credit inquiries and paying down large debts.

Step 2: Prequalify where you can

Prequalification is an assessment that determines the likelihood of a borrower being approved for a loan. 

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Lenders perform a soft credit check that doesn’t impact the borrower’s credit score. Using this information, the lender provides the borrower with an estimated loan amount, interest rate, and terms. 

Step 3: Lower your DTI ratio 

Another key factor influencing your ability to get approved is your DTI ratio. Reducing your debt or increasing your income could improve your chances of getting approved for a home equity loan. If it’s possible to do both, even better. 

Boost equity (if possible)

Greater equity in your home translates into greater security for lenders. You can grow home equity in a few ways. The first and most obvious way is to make home improvements that add value to your property, such as kitchen renovations or bathroom additions. Another way to boost equity is to make additional payments on your mortgage whenever possible. 

Consider a co-signer

Bringing on a co-signer with good credit can improve your chances of getting approved, secure a lower interest rate, and obtain more favorable loan terms. Make sure that your co-signer is fully aware of their financial responsibility in the agreement and of your ability to pay back your loan. 

Final thoughts on taking out a home equity loan with bad credit

Getting approved for a home equity loan with bad credit can be challenging, but it's not impossible. Credit scores are just one of many factors lenders take into account 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. 

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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.

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Tap into your home equity with a HEI from Point. Qualifying homeowners benefit from no monthly payments, flexible credit evaluations, and the ability to use the funds at their discretion. Explore Point’s HEIs here.

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