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Updated on Thursday, February 14, 2019
There are many reasons to consider taking out a home equity loan (HEL). You might have a significant expense coming up and the equity in your home to back it. You might also be intrigued by the relatively low interest rates, especially if you’re familiar with how high interest rates can be for personal loans.But will you be able to swing a home equity loan with bad credit? The short answer is yes — HEL fortunately are determined by several factors, and your credit score is only one of them. While securing a HEL will be harder with bad credit, it’s possible when you can show lenders other winning qualities. Keep reading for what you need to know about securing a home equity loan with bad credit.
What’s considered ‘bad credit’ for a home equity loan?
Every bank has a set of standards to determine qualifying credit scores for home equity loans, but as an example, this is how Wells Fargo breaks it down:
- 620 and below: You might have a hard time qualifying
- 621 to 699: You might have a hard time and will probably pay higher interest rates
- 700 to 759: You will usually qualify (depending on other factors), but you may still pay higher rates
- 760 and up: You will usually be eligible for the best rates (depending on other factors)
As you can see, it can be tough to qualify for a HEL with a credit score lower than 620. If your score is in one of the two higher categories (between 700 and 760), your credit score probably won’t inhibit your ability to qualify, but you may end up paying higher interest rates.
Other factors that affect your eligibility for a HEL
Besides your credit score, there are other factors that lenders take into account when determining your eligibility for a home equity loan: your debt-to-income (DTI) ratio, which is defined as the total amount of your monthly debt payments divided by your monthly income. Lenders use this number to determine your ability to pay back your debts — including the amount you’ll potentially owe them.
Another factor lenders take into consideration is the amount of equity you have in your home — in other words, the percentage of your home value you still owe on a mortgage versus the percentage you actually own. You’re typically limited to borrowing a maximum amount equal to 85% of the equity in your home. Some sources quote 80% as the safest ratio, advising you to have at least 20% equity in your home when applying for a home equity loan.
Other factors that come into play when determining your eligibility include your home’s current market value, your income, assets and other monthly expenses — all are a measurement of your ability to repay your debt.
What to expect in the application process
Depending on the details of your application, the processing time for a home equity loan application may take between three to five weeks or even longer. If any part of your application is less than desirable to the lender (including your credit score) you can expect the terms of your loan agreement may reflect that. Lenders may limit the amount you can borrow or set your loan with higher interest rates.
How to improve your chances of approval for a home equity loan
If you’re worried your credit score may be dragging down your home equity loan application, you have several options to improve it. One is to involve a cosigner. If a lender is unwilling to take on the risk of an application with only your name, adding a cosigner (who will also be held responsible for the debt) might improve your chances of approval.
Another option is to work on improving your credit, which might mean pay off your debts (thereby improving your DTI ratio, which is a big player in your credit score) and waiting until your credit score or equity improves before applying.
Alternatives to a Home Equity Loan
If you feel you may not qualify for a home equity loan and are looking into other options, here are a few to consider.
This type of loan is a refinancing of your existing mortgage, usually with the intention to reduce your interest rates, lower your monthly payment and even potentially access some cash when you take out a loan for a higher amount than the original.
A home equity line of credit (HELOC) is a revolving line of credit where you pay back what you spend, with the total amount available based on your home’s appraised value.
You’ve likely heard of of personal loans, and although you can get one with a relatively low credit score, careful consideration should be given to these loans because they can be known for having an interest rates as much as 35%, which is higher than a credit card. Ultimately, it can cost you a lot of money in the long run.
|Loan Type||Average Minimum Credit Score Needed||Cost|
|Home Equity Loan||700||Higher interest rates will drive up the borrowing cost over time|
|Cash-out refinance||620||A larger loan will cost more over time|
|HELOC||670||Interest rates may be variable, but you’re only required to pay back what you spend|
|Personal loan||580 to 600||Very high interest rates will significantly drive up the cost over time|
How to shop for a HEL
Like any loan, it’s important to shop around for the best deal. Even if you have a low credit score, you can still secure multiple quotes from different lenders before making a final decision. You may also want to use a home equity comparison tool to be sure you’re getting the best possible deal.
The bottom line
Getting a home equity loan with bad credit definitely won’t be easy, but it’s still doable. Keep in mind that you always have alternative borrowing methods available (like those listed above) and that improving your credit score is a way to find yourself in a more favorable loan agreement. To start your home equity loan search, try our comparison tool, you can fill out an online form and compare offers from multiple lenders in minutes.