Getting a Home Equity Loan or Home Equity Line of Credit With Bad Credit

Cole Mayer  | 

Can I Get a Home Equity Loan With Bad Credit?

Yes, you can get a home equity loan with bad credit. Home equity loans and home equity lines of credit are both secured by your home, which can make them easier to borrow than other types of loans or financing, even with bad credit. That being said, before you apply for financing by putting your home on the line, you should take a moment to consider why your credit score is low and whether additional debt is a good idea. If you can’t handle the payments, you could end up losing your home.

Paying Off Debts With a Home Equity Loan or HELOC

Consolidating Debt With Home Equity Loans

One of the main reasons homeowners take out home equity loans is to consolidate debt. Home equity loans usually come with relatively low interest rates, and are for large lump sums of money, which makes them ideal for consolidating debt into one big loan. This can make the debt more manageable as the interest you pay overall decreases, and can help boost your credit score. However, before you consider applying for a home equity loan, it’s important to do your research and compare loan terms and forgiveness, as well as other programs and assistance, before consolidating to make sure it’s the right choice for you.

Risks of Paying Off Debt With Home Equity Loans

Although there are many benefits to consolidating your debt with home equity, the risks are also extensive. You should not use home equity loans for home renovations or to pay off your debt unless you are absolutely certain you will be able to handle the monthly payments. By using your home to secure a loan or line of credit, you are entering into an agreement that allows the bank to foreclose your home in order to receive payment, which could leave you without a home — if you fall behind on your payments. If you’re not sure you’ll be able to handle consolidating your loans, it may be better to stick with your existing debts, and look for alternative options to avoid getting yourself into a worse situation.

How Much Equity Do I Need?

Whether you are considering a home equity loan or a home equity line of credit, lenders will generally require you to have about 30 percent equity stake in your home, although some may accept as little as 15 percent equity. Generally, the lower your credit, the more equity you will need to be eligible for a loan or HELOC. Even if you didn’t make a 20 percent down payment on your home, it may have appreciated enough since you bought it for you to qualify for a loan. You may need an appraisal, but most lenders will do a quick market survey to give you an estimated home value and determine your equity.

How Much Can I Borrow With a Home Equity Loan or HELOC?

The amount you can borrow depends on your equity, the value of your home, and the lender you go through. Typically, you can get a rough estimate of what you’re eligible for by finding the difference between your existing mortgage and the equity of your home, and then 80 percent of that amount is usually the most you’re eligible for. However, pay attention to the interest rates, repayment periods, and your debt to income ratio when deciding how much to borrow. It’s important to consider whether it’s better to use the loan to consolidate debts, or simply get out of delinquency, depending on your situation, and you should always make sure your income will allow for another loan.

What Credit Score Do I Need for a Home Equity Loan or HELOC?

The minimum credit score required for a home equity loan or a HELOC varies from lender to lender, but generally, the minimum is 620. However, some lenders may be willing to negotiate the minimum credit score for a higher interest rate, as a secured loan ensures them that they will be paid regardless of whether or not you are able to afford the loan. Therefore, you should check your credit score before applying for the loan to know what to expect, and do your research regarding lenders and the deals they are willing to make to find the best rates.

How To Raise Your Credit Score

Even if you meet the minimum credit score to be eligible for a home equity loan, you should do what you can to raise it as much as possible before applying order to get the best deal. Do a credit analysis to dispute any errors, which are surprisingly common, and use any disposable funds to improve your debt to income ratio. Pay off any bills you may have in collections as these can also hurt your credit score. Even raising your credit score by a few points can make a difference in the APR and interest rate of your loans.

Getting a home equity loan can be a good opportunity for someone with bad credit to consolidate debt and take care of financial matters they would otherwise be unable to afford. Bad credit can make unsecured personal loans difficult to have access to, so if you’re confident that you can handle a secured loan, it may be the right decision for you. Improve your credit score however you can before applying for the loan in order to get the best possible rate and to be able to handle the monthly payments, and shop around to ensure you find the best lender to meet your needs and get you on track to financial stability.


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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42

This post was updated September 17, 2018. It was originally published August 28, 2018.