How to get a home equity loan without perfect credit

Home prices have appreciated, but some homeowners are finding it difficult to tap their equity due to bad credit. Many home loan options, including cash-out refinance and HELOCs, typically require that homeowners have good credit in order to be eligible. If you have bad credit, don’t give up hope on accessing your home equity to get the money you need. Learn more about your home equity loan options, how to qualify, and alternatives you should consider.

What is a home equity loan?

A home equity loan is a fixed-rate term loan that’s backed by your home’s equity. These loans typically offer lower rates than personal loans or credit cards because they are secured by your home. However, they generally have shorter repayment terms than a mortgage, with terms ranging from 10 to 30 years. Having a shorter loan term can lead to higher monthly payments, which can make home equity loans less affordable than a mortgage payment of a similar amount.

Challenges of getting a home equity loan with bad credit

Your credit history is an indication of the risk a lender takes when lending you money. It captures your propensity to make payments on time, avoid getting into too much debt, and other positive money behaviors. When you have bad credit, lenders often charge higher interest rates and fees. In some cases, you may not be approved at all.

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Traditional lenders often shy away from lending to customers with bad credit. Homeowners with bad credit who want to tap their home equity often have to turn to alternative lenders, private loans, and other subprime financing. Generally, these loans tend to have higher interest rates and fees. These unfavorable terms and conditions can make your financial situation even worse, especially if you are having trouble making your payments on time.

Qualifying for a guaranteed home equity loan with bad credit

To encourage homeownership for everyone, the Federal government guarantees some types of loans. The backing of the Federal government gives banks, credit unions, and other lenders the confidence to lend to borrowers with bad credit or a thin credit history. However, government-backed loans tend to concentrate on first mortgages rather than home equity loans or HELOCs. These guarantees encourage people to buy homes but don't give them that same backing to pull cash from their equity.

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These loans often have different criteria for approval than a traditional loan. Some of these features make guaranteed loans more restrictive, while others open up homeownership to more people. FHA, USDA, and VA loans require that the home be in a certain condition for loan approval, while conventional loans do not. For example, the appraiser for an FHA loan must validate that the kitchen is in working order.

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FHA, USDA, and VA loans also make buying a home more accessible. Loans backed by the Federal government tend to have lower interest rates, fees, and credit score requirements than these borrowers could normally qualify for without those guarantees. They also tend to have smaller down payment requirements, which reduces the amount a homebuyer must save before qualifying to buy a home. Lower credit score requirements make them an ideal choice for borrowers with bad credit.

Finding lenders and comparing options

Finding lenders that specialize in borrowers with bad credit can be challenging. Traditional banks often avoid riskier loans and focus on applicants with Good to Excellent credit. However, numerous lenders lend to borrowers with bad credit or a thin credit profile.

Finding lenders catering to bad credit

If your credit score is too low for your local bank, there are other lenders that focus on bad credit borrowers. While some of these lenders are predatory, there are others who are reputable.

• Start with your existing bank: Talk to a banker or loan officer to find out if you qualify. Banks may be more willing to lend to existing customers with a good track record of deposits and payments.
• Talk to a credit union: Credit unions are non-profit financial institutions. They tend to have lower credit criteria and more favorable terms than banks.
• Ask for referrals: Talk to friends and family who are in a similar financial situation. They may have a referral for a home equity loan, or they can share stories of banks to stay away from.
• Look for community lenders: Community organizations that help people with financial issues can recommend lenders specializing in borrowers with bad credit. They may also offer free or low-cost education to learn how to boost your credit before submitting your application.
• Online comparison site:. Many online sites allow visitors to submit their basic information to receive quotes from prospective lenders. Be careful with sharing too much personal information until you've chosen a lender.

Factors to consider when choosing a lender

Borrowers have many options when choosing a lender. Aside from getting a good interest rate and low fees, there are other factors you should consider.

• Other products available: It is often easier if you can have multiple products at the same financial institution. For example, you may be able to have your checking, savings, and credit card at the same bank as your home equity loan. This allows you to see all of your accounts in one place and easily transfer money between accounts.
• Ease of use: Does the lender have a website and mobile app? Online access makes it easy to view your loan history, make payments, and download statements.
• Reputation: What is the reputation of the lender? Are they fair to customers and provide good customer service?
• Locations and customer service: Does the lender have local offices where you can speak to someone in person? What are their customer service hours if you have a question about your account?
• Extra fees: What fees does the lender charge? Are these fees reasonable?

Comparing loan rates and terms

Before choosing a lender, it is important to compare interest rates, fees and repayment terms for each loan option. Many borrowers focus on the interest rate, but this doesn't factor in the fees that the lender charges. Instead, compare the APR among lenders to get an apples-to-apples comparison.

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Also, look at the repayment terms. Getting a longer-term loan reduces your monthly payment amount, but it also leads to higher overall interest costs. Determine whether the interest rate is fixed or variable and if the payment includes both interest and principal. While an interest-only loan has lower monthly payments, the balance owed won't decrease unless you pay extra.