How to Get a Home Equity Loan With Bad Credit

Can you get a home equity loan with bad credit? In many cases, yes—homeowners can borrow against their equity even with bad credit. The terms get harder as scores drop, and not every lender works with every borrower. But it’s often possible.

A home equity loan is secured by your home, which makes it less risky for lenders, even if your credit is a little ugly. Credit score matters, but it’s only one of the factors that lenders weigh. Equity in your home, your debt-to-income ratio, and stable income all matter, too. And you can often get by with weakness in one area if you’re strong in the others. 

Most lenders look for a credit score of at least 600. They also want to see at least 15% to 20% home equity (after closing the loan) and a debt-to-income ratio, or DTI, of 43% or less. A riskier borrower will generally pay a higher rate and receive less money.

Imagine that a homeowner whose property is worth $500,000 wants to borrow $25,000. And his credit score is 620. If he only owes $300,000 on his mortgage and his DTI is just 25%, he should be able to find lenders open to approving him. But if his DTI is 45% and he owes $425,000, it will be much harder. 

Your best path depends on your overall risk and how quickly you need the funds. To understand what a home equity loan is and how it works, start there.

Are you in the ballpark? What lenders look at beyond your credit score

Credit score is not the whole picture. Lenders weigh four inputs: your credit score, home equity, debt-to-income ratio, and income stability. Strength in one area can sometimes offset weakness in another.

• Home equity (CLTV). Lenders typically require 15% to 20% equity in your home. The combined loan-to-value (CLTV) ratio equals all loans on your property (including the new home equity loan) divided by its current value. Lenders frequently set their maximum CLTV at 80% to 85%, although some do go higher. Having less equity narrows your options.
• Debt-to-income ratio (DTI). Lenders typically look for a DTI of 43% or lower. Some accept up to 50% with compensating factors. DTI is often the variable borrowers can most quickly improve before applying.
• Income stability. Consistent, documentable income matters. Lenders want to see that you can handle a second mortgage payment alongside your existing obligations.
• Credit score. Most lenders require a minimum of 600. Traditional lenders generally prefer 680 or higher, and stricter lenders may want 720 or more. Scores below 580 are highly unlikely to qualify with mainstream lenders—though nonprime lenders will often do the deal if you have enough equity and are willing to pay a higher rate.

One more thing: a lower score commonly means a higher rate. Typical lender pricing is divided into tiers, and being even one point above or below a threshold (for instance, 679 if the cutoff is 680) could make a real difference in your terms.

Which type of lender is most likely to work with you

Not all lenders approach lower-credit borrowers the same way. Matching your profile to the right type of lender matters more than applying everywhere at once.

• Credit unions are generally the most flexible starting point. They use relationship-based underwriting, which means your financial picture carries more weight than it would at a large bank. If your score is in the 620 to 670 range, a credit union is often the best first call. Membership is required, though many have open or community-based eligibility.
• Community banks and regional lenders tend to operate more like credit unions than large national banks. Portfolio lenders keep loans on their own books rather than selling them. That gives them more room to work outside standard underwriting guidelines.
• Online and non-QM lenders are a mixed picture. Some non-prime lenders focus on borrowers who have below-standard credit. Rates are usually higher, and you’ll want to compare lender reviews and costs. Rates, fees and the customer experience vary widely here.
• Large national banks tend to require 680 or higher. Generally, they’re not the first call if your score is at or below 680.

A word on “guaranteed approval” offers: they’re red flags. Legitimate lenders evaluate your credit, income, and equity before making a decision. 

As of the most recent CFPB analysis of HMDA data, about four in 10 HELOC applications were denied. That’s not a reason to give up—it’s a reason to put your best application forward. 

Five strategies that could improve your approval odds

The right move depends on your score, your equity, and your timeline. These five strategies give you the most leverage before you apply.

1. Add a co-borrower or co-signer. A co-borrower shares both ownership and legal responsibility for the loan. A co-signer doesn’t share title to the home, but is willing to take responsibility if you don’t make your payments. If you have a willing, financially stable partner or family member, this is often one of the most effective moves available.
2. Build your equity cushion. If your CLTV is near the lender’s limit, you’re a riskier prospect. Waiting for your mortgage balance to decrease or your home’s value to rise might shift the outcome. Equity above 20% to 25% may offset a lower credit score in the lender’s calculation.
3. Lower your DTI before applying. Paying down revolving balances, especially credit cards, can reduce your DTI and improve your score at the same time. It’s one of the highest-leverage short-term moves available to most borrowers.Paying down revolving balances usually improves your credit score as well by reducing your credit utilization.
4. Check your credit report for errors. Errors are more common than many people realize. Free reports are available at AnnualCreditReport.com. Disputes are free and processed directly with the credit bureaus: Experian, Equifax, and TransUnion. Start this process sooner rather than later, as disputes take time to resolve. 
5. Apply to the right lender first. Match your profile to where you’re most likely to succeed. Unless you like wasting time and getting declined.

When a traditional home equity loan may not be the right fit

Sometimes a traditional home equity loan isn’t the right tool. Your credit score may be below the floor most lenders accept, your equity may not be there yet, or the terms may not work. You have a few paths worth considering.

FHA cash-out refinance

This replaces your existing mortgage rather than adding another loan. FHA guidelines set a minimum credit score of 580 for standard financing. Scores of 500 to 579 could qualify with at least 10% equity. However, individual lenders often set higher minimums through their own overlay policies, and many FHA-approved lenders require 620 or higher. 

See our guide to FHA cash-out refinancing.

Home equity investment (HEI)

An HEI is not a loan—there’s no debt, no monthly payment, and no interest. The investor advances a lump sum in exchange for a share of your home’s future value. Repayment happens when you sell, refinance, terminate the agreement, or reach the end of the term. Some HEI companies allow scores as low as 500 to 550,  and they commonly require at least 25% equity.

The trade-off is real. You’re giving up a portion of any future increase in your home’s value. The CFPB has also noted that HEI companies frequently don’t disclose ongoing obligations prominently: the homeowner remains responsible for property taxes, hazard insurance, and maintenance throughout the term. Consider a home equity line of credit as another option.

The case for waiting

If your score is near a pricing tier cutoff, say 665 while the next cutoff starts at 680, it may be worth pausing. A focused 60 to 90 days of reducing revolving balances and disputing credit reporting errors could shift your terms meaningfully. Waiting could save you money in the long run.

When not to proceed

If your DTI is already stretched, a second mortgage payment could create real financial pressure and possibly lead to foreclosure. It’s probably not worth risking your home unless you really need the money for something more important than a vacation or a shopping spree. 

Another important thing to note: Interest on a home equity loan is tax deductible only if the funds are used to buy, build, or substantially improve your home. Other uses, such as debt consolidation, are not deductible. Consult a tax advisor for your specific situation. 

Explore home equity financing options to compare these paths.

Bills Action Plan

1. Pull your free credit report at AnnualCreditReport.com and check for errors before you do anything else. Disputes take time to process, so the sooner you start, the better.
2. Calculate your CLTV: divide your current mortgage balance by your home’s estimated value. If you’re above 80%, your options narrow. At 75% or below, they open up.
3. Check your DTI: add up monthly debt payments and divide by gross (before-tax) monthly income. If you’re above 43%, work on that number before applying.
4. Match your profile to the right lender type. Start with credit unions or community banks if your score is below 680.
5. If a traditional home equity loan isn’t accessible yet, request a risk-free prequalification without a hard credit pull from an HEI provider. Carefully examine  that path before committing.

Key Terms

CLTV (combined loan-to-value): The ratio of all loans secured by your home to your home’s appraised value. Most lenders cap this at 80% to 85%.

DTI (debt-to-income ratio): Your total monthly debt payments divided by gross monthly income. Most home equity lenders want this at 43% or less.

HEI (home equity investment): A cash arrangement, not a loan, in which an investment company advances you a lump sum in exchange for a share of your home’s future value. No monthly payments; repaid when the home is sold or refinanced.

Non-QM lender: A lender that offers mortgages outside standard “qualified mortgage” underwriting rules, often with more flexible credit requirements.

Portfolio lender: A lender that keeps loans on its own books rather than selling them, giving it more flexibility to set its own underwriting standards.