Can I get a home equity loan for poor credit?
Yes, you can. A low credit score does not necessarily mean that your lender will deny you a home equity loan. Some home equity lenders allow FICO scores in the “fair” range (600 low in the 600s) as long as they meet other requirements regarding debt, equity and income.
I’m not saying that it’s easy. Lenders tend to be even more strict with these loans than mortgages. Still, that’s not impossible. Here’s how to get a home equity loan with poor credit:
What is a “good” credit score for a Home Equity Loan?
First, let’s define the terminology. When it comes to home equity loans, lenders set up high bars for creditworthiness. This is more expensive than a mortgage. That’s because they are considered more risky than mortgages. You, the applicant, already owes a great debt. If your home is seized by default, your home equity loan as a “second lien” will only be paid rear Primary (original) mortgage.
Moreover, like most mortgages, home equity loans do not have a robust secondary market to sell. Therefore, lenders usually have all the risks they have to keep after they make a call. As a result, home equity lenders set stricter standards.
For reference, here is how FICO (the most popular credit scoring model) classifies various credit scores:
Score |
Classification |
|---|---|
| 300-579 | poor |
| 580-669 | impartial |
| 670-739 | good |
| 740-799 | Very good |
| 800-850 | wonderful |
| sauce: myfico.com | |
Most home equity lenders request a score set head-on in the “fair” range. A 500s score (good enough for an FHA mortgage) will have a hard time qualifying for a home equity loan. Some lenders have loosened their recent standards and have approved applicants with a score of 620. However, “good” scores above 700 remain at the threshold for many institutions. It may vary within one lender depending on factors such as the amount of the loan and other loan terms.
And of course, like with other loans, the lower your credit score, the less likely you are to qualify for the highest interest rate.
How to apply for a bad credit home equity loan
Before applying for a home equity loan, remember that it’s not just a financing issue, but also a way to overcome a lower credit score and get the best possible fee. Here are some steps to take:
1. Check your credit report and score
Check out your credit report at AnnualCreditreport.com to see where you are standing and what your score is. If you have any errors such as incorrect contact information, please contact your credit department (Equifax, Experian, Transunion) and update it as soon as possible. Your score may vary slightly from station to station. Keep in mind that if the lender is pulling from all three agents, the lender will probably use the central one.
2. Determine the stock level
To qualify for a home equity loan, lenders typically require you to own at least 15 or 20% of the home in full. The amount of stock you have, the value of your home, and your total lending value (CLTV) ratio will help you determine the amount you can borrow.
Home Equity Loan Calculator
Bankrate’s Home Equity Loan Calculator allows you to estimate your potential home equity loan amounts.
Please access the calculator
Here’s a simple way to calculate fairness: Take the value of your home and deduct the remaining balance on your mortgage. The lender will only consider the officially assessed value of your home when determining the amount you can borrow, but you can get an idea of the value of your home through a bank rate or a real estate listing portal or a brokerage company.
Let’s say your home is worth $420,000 and you have $250,000 in your mortgage payment:
In this example, we have $170,000 home equity.
However, this does not mean you can borrow $170,000. If the lender needs to maintain at least 20% of the shares, it should maintain $84,000 ($420,000 *$0.20). This could potentially take away a home equity loan of up to $86,000 ($170,000 to $84,000).
Remember: When taking away a loan, make sure that the loan and worthwhile ratio (CLTV) (total of all home debt) is within the lender’s limits, usually below 80%.
3. Calculate the DTI ratio
The DTI ratio is a measure used by a lender to determine whether he or she can afford to undertake more debts. To calculate the DTI ratio, simply split your monthly debt payments with your monthly total income. For example, let’s say you bring in $6,000 a month in income, and have a $2,200 mortgage payment per month and a $110 student loan payment per month.
To make things even easier, you can use Bankrate’s DTI calculator.
For home equity loans, most lenders are looking for a DTI ratio of less than 43%.
4. Consider co-signers
If your credit score makes it difficult for you to obtain a home equity loan, you may get approval or get co-signers with better credits.
Co-signers are responsible for repaying the loan in the same way as the primary borrower, even if they are not actually planning to make payments. If you are late in paying your loan, their credit will suffer with you.
The additional guarantees they provide may help you get over the hump if your credits are unclear. But you still need to qualify yourself basically. “While co-signers can help with credit and income issues for applicants with low credit scores, the key applicant or primary borrower must ultimately have at least a minimum credit score based on the bank’s underwriting guidelines.”
5. Try the lender you already work with
If your bank, credit union, or mortgage lender offers home equity products, you may be able to increase some flexibility or at least help with your application as you are an existing customer.
“A loan officer who is well versed in the details of the applicant’s situation will help to present it to the underwriter in the best possible way,” says Dibgunara.
6. Write a letter to the lender
Write a letter of explanation why your credit score is low, especially if it’s been hit recently. This letter should effectively explain the credit issue, avoid breaking up, and include related documents such as bankruptcy documents. For example, if you were affected by a delayed payment due to a loss of work, but are currently employed, the lender could take this context into consideration.
How to get HELOC with poor trust
An application for HELOC is roughly the same as applying for a home equity loan, but if you have poor credit, the loan may have a slight advantage over your credit line. This is because you know exactly what you need to pay back each month, as your residential stock loan has a fixed interest rate and a fixed payment. This predictability helps you better manage your budget and keep up with payments.
HELOC, on the other hand, has volatility, which can cause unexpected increases in monthly payments. As a result, lenders often have a higher HELOC credit score standard than home equity loans.
Lenders who provide poorly credited household capital loans
We have a home equity lender that caters to borrowers with low credit scores. Here are some of those requirements to consider.
| Lender | Bankrate score (1-5 scale) | Loan type | Lowest credit score | Maximum CLTV | Maximum DTI |
|---|---|---|---|---|---|
| shape | 4.2 | helic | 640 | 75%-90% | private |
| rate | 4.1 | helic | 620 | 90%-95% | 50% |
| Spring eq | 4.1 | Home Equity Loan, HELOC | 640 Home Equity Loan, 660 Helock | 90% | 43% |
| TD Bank | 3.8 | Home Equity Loan, HELOC | 660 | 90% | private |
| Connexus Credit Union | 4.2 | Home Equity Loan, HELOC | 640 | 90% | private |
| Discover | 4.0 | Home Equity Loan | 660 | 90% | 43% |
What if your home equity loan application is rejected?
If your home equity loan application is denied, don’t despair. First, ask the lender for specific reasons why the application was rejected. The answers will help you deal with any issues before applying in the future.
If credit is one of the determinants, you can improve your score by paying on time and paying off any outstanding debts. If you don’t have enough shares in your home, wait until you have created a larger interest (mainly through monthly mortgage payments) before submitting a new application.
Both of these approaches can take six months to a year to make a significant difference in your credit profile. If you’re in a more hurry, consider applying to another lender as the criteria may differ. Remember that more generous terms often mean higher interest rates or fees.
And of course, other forms of funding can be considered.
If you have poor credit, then a home equity loan alternative
If you need cash but have poor credit, a home equity loan is just one option. Here are a few options:
Personal loan
Personal loans are easier to qualify than home equity products and are not tied to your home. However, personal loans have high interest rates and shorter repayment terms. This leads to more expensive monthly payments compared to what you could get with a home equity loan.
Cash-out refinance
Cash-out refinance involves taking out a brand new mortgage for more than you have on an existing mortgage, paying off your existing mortgage, and taking the cash difference. Most lenders need to maintain at least 20% of your home’s capital to cash out.
However, warning: Cash-out refi makes most sense if you can qualify for a lower fee than your current mortgage and can afford to pay the closing fee. It may be impossible to get that low rate because of poor credit.
Reverse mortgage
Reverse mortgages allow homeowners over the age of 62 to withdraw their home capital as a source of tax-free income. These types of loans need to be repaid depending on your deathbed or when you move or sell your home. From medical costs to home renovations, you can use reverse mortgages, but you must meet several requirements to qualify.
Shared Stock Agreements
Home equity investment companies may work with you even if you have a lower credit score than traditional lenders accept. These companies offer cooperative share agreements that will receive a lump sum in exchange for your home ownership rate and/or its appreciation.
Unlike Home Equity Credit (HELOCS) and Home Equity Loans, you do not make monthly repayments with shared equity arrangements. Some businesses wait until you sell your home before collecting what they are owing. Others have multi-year agreements that pay the balance in full at the end of the stated period.
Understand all the requirements for this complex arrangement. Technically, you are not owing money, you are selling stocks in your home. Naturally, for financial experts who want to see the profits of their investments.
Tips for improving your credit before getting a home equity loan
To increase your chances of getting approved for a home equity loan, work to improve your credit score well before applying – for at least a few months. Here are three tips to help you rebuild your credits:
- Pay your bills on time every month. At the very least, make a minimum payment, but if possible, try paying off the balance perfectly. Don’t miss that date.
- Please do not close after you have repaid your credit card. Leave it open or charge enough to make small repetitive payments each month. Closing your card may reduce your credit usage rate (CUR) and your score may decrease. Recommended Cur: 30% or less.
- Beware of new credits. While higher credit limits on your card or getting a new card can lower your credit usage rate, you won’t be able to make the most of things or blow out a bigger balance right away. Treat new available funds as sacred savings.
FAQ for getting a home equity loan with poor credit
Additional Reports by Mia Taylor
