How to get a home equity loan with bad credit
Quick insights
- A home equity loan lets you borrow against the equity of your home.
- Lenders may consider several factors beyond your credit score when reviewing your application.
- Taking steps to help build your credit may help improve your eligibility to apply for a loan.
Many homeowners build significant equity over time, but if you have a lower credit score, you may feel like you can’t benefit from this equity. If you need funds for a major expense or want to use home equity to pay off credit card debt, you might wonder if you can get a home equity loan with a low credit score. Because a home equity loan is secured by your home, using it to pay off unsecured debt (like credit cards) can increase the consequences of missed payments.
While lenders do consider your score, having substantial equity and a steady income could help. Let’s explore how these loans work and what lenders typically look for.
How you can get a home equity loan with bad credit
Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is “bad credit.” While there is technically no definition of a “bad” credit score, in this article, the term “bad credit” refers to low credit scores.
A home equity loan allows you to borrow a lump sum of money using the equity in your home as collateral. Equity is the difference between what your home is currently worth and how much you still owe on your mortgage.
As with other types of loans, a higher credit score usually helps you get more favorable terms. A low credit score can make the process more challenging, but it may still be possible to get a home equity loan because lenders look at your entire financial picture.
Other factors that may impact your eligibility
When evaluating your application for a home equity loan, lenders typically review several aspects of your finances:
- Sufficient home equity: Many lenders set minimum equity and maximum loan to value (LTV/CLTV) requirements, which can vary by lender, loan amount, property type, occupancy, lien position and location. You can calculate your home equity to see how much equity you can borrow; having sufficient equity helps protect the lender if you’re unable to repay the loan. Requirements can differ by lender and may change over time.
- Debt-to-income ratio: This ratio compares your total monthly debt payments to your gross monthly income. A lower ratio suggests you may have enough income to comfortably manage new loan payments.
- Consistent income: You typically need to provide proof of steady employment and reliable income. This shows lenders you have the means to repay what you borrow.
- Payment history: A strong recent payment history may be one of several factors a lender considers alongside your credit profile.
Steps you might consider before applying
If you’re researching how to get a home equity loan, it may be helpful to understand where your credit stands. Some banks and credit unions provide tools for monitoring your score.
For example, Chase Credit Journey® is a free online tool for anyone 18 or older with a valid U.S. address and Social Security number (SSN), offering access to your credit score and personalized score improvement plans provided by Experian™—no Chase account required.
Alternatives you might consider
If you find that home equity loans are difficult to secure, you might consider exploring other options.
- Home equity line of credit (HELOC): A HELOC functions more like a credit card, allowing you to draw funds as needed.
- Personal loans: These are typically unsecured, meaning they don’t require collateral like your home. However, they may come with higher interest rates if your credit score is in a lower tier. Chase does not offer personal loans.
- Co-signer: Applying with a co-signer who has a higher credit score could potentially help your eligibility to apply. However, the co-signer becomes legally responsible for the debt if you cannot pay.
In summary
While a low credit score can present challenges, it doesn’t automatically disqualify you from accessing your home’s equity. Lenders evaluate multiple factors, including your income and existing debt. You may consider exploring tools like Credit Journey® to help monitor your progress before applying. Small positive habits can make a difference over time.
