Thanks to rising home prices, homeowners have gained a lot of equity over the last few years.
One way to use that equity is to get a home equity product — a home equity loan or home equity line of credit, also called a HELOC. These turn your equity into cash, which you can then use to improve your house, pay off debts, or cover any other cost or expense you might be dealing with.
As with any loan, though, your credit comes into play when tapping your home equity. A higher credit score will typically mean easier qualification and better interest rates. And a lower score? That can pose some challenges — but it doesn’t mean getting a home equity loan or HELOC is impossible.
Do you have less-than-perfect credit? Here’s how to get a home equity loan or HELOC despite it.
- Most lenders require a minimum credit score of 620 for home equity loans and 680 for HELOCs, though requirements vary.
- You can still qualify for a home equity loan or HELOC with poor credit if you have strong compensating factors like low debt, solid income, or significant home equity.
What Are Home Equity Loans and HELOCs?
As a homeowner, equity is the stake you actually own in your home — or the home’s value minus any mortgage balance you have on it (that part’s owned by your lender).
A home equity loan lets you borrow from that equity stake and turn it into a one-time lump sum payment. You then pay the balance off over time in fixed monthly payments — typically for 10 to 30 years, depending on what term you choose.
HELOCs are similar in that they let you turn your equity into cash, but they work slightly differently. Namely, they come as a line of credit, meaning you’ll get a maximum limit and can withdraw money up to that amount over a period of time — usually 10 years. This is called the draw period, and during it, you’ll typically owe interest-only payments each month. After that point, you’ll enter the repayment period, when you’ll start making full principal and interest payments to your lender.
Second Mortgages and Their Risks
Both home equity loans and HELOCs are types of second mortgages, meaning they’re loans you take out in addition to your main mortgage. They’re also “second-lien,” making these loans riskier to lenders than traditional mortgages.
“Second-lien” simply means that they come second in line in terms of repayment. If you were to stop making payments and enter foreclosure, your main lender would get the proceeds from the home’s sale or auction first. Any leftovers (if there were any) would go to your home equity lender next.
Because of this, home equity products are simply riskier to take on for lenders. To account for this risk, lenders often charge higher interest rates and have stricter qualifying requirements.
Home Equity Products vs. Cash-out Refinances
Cash-out refinancing is another way to borrow from your home equity, but it’s not always the best option for every homeowner.
With this strategy, you replace your main mortgage with a new, larger one, taking the difference between those two balances in cash.
Cash-out refinances are not a second loan, but instead, they replace your first mortgage entirely — with a new term, rate, payment, etc. This can be a good option if rates have dropped since initially taking out your loan, but not such a good idea if you’d have to trade in a super-low rate for a much higher one.
Can You Qualify for a HEL or HELOC with Poor Credit?
Because home equity loans and HELOCs are a little riskier for lenders to take on, you can usually expect stricter credit score requirements. For example, while FHA lenders can allow for credit scores down to 500, home equity lenders will typically only take scores of 620 or higher. This falls into the “fair” credit score range, according to FICO.
In some cases, a lender may allow for scores below this, but only if you come with strong compensating factors. These can include things like having significant cash in savings, a hefty equity stake, or very few debts.
Consumers with credit scores under 580 will likely have a very hard time finding a home equity lender willing to work with them, as scores this low can indicate difficulty repaying debts.
Risks of a Home Equity Loan or HELOC
Home equity loans and HELOCs can give you access to cash when you need it, but they have some drawbacks and risks for consumers, too.
These include:
- Higher interest rates: Rates on home equity products are higher than those on first mortgage loans — typically by at least a few percentage points.
- Closing costs: Most home equity loans and HELOCs will come with closing costs, which can run anywhere from 2 to 6% of the loan amount.
- Second payment: Home equity loans and HELOCs are loans you take out in addition to your main loan. They add a second monthly mortgage payment to your household, which could cause financial strain.
- Risk of foreclosure: These loans use your house as collateral. If you’re unable to make your payments, your lender can seize your home.
- Variable rates: Most HELOCs have variable interest rates, which means your rate and payment can increase over time. This can make them hard to budget for, particularly later on in your loan term.
Keep in mind that a lower credit score may increase the costs of your loan — including your interest rate and payment — making them riskier to take on, too.
Home Equity Loan Requirements
Requirements vary based on the type of loan you’re getting.
For a home equity loan, you can expect to need:
- Credit score: 680+ for the best terms and rates, 620+ to qualify
- Debt-to-Income ratio (DTI): 43% or lower, in most cases
- Proof of financial stability: Documented regular paychecks and bank deposits, tax returns showing steady or growing annual earnings, strong payment history with your current lender
- Equity / Loan-to-Value ratio (LTV): 15 to 20% equity, a maximum combined LTV (both mortgage loans put together) of no more than 80 to 85%
Regarding that last bit, it’s important to understand how equity works. You gain equity when you pay down your main mortgage or when your house increases in value. This also increases or decreases your LTV.
Additionally, your initial down payment also plays a role. For example, if you put down a 20% down payment, you’d automatically have 20% equity in the house right off the bat. Smaller down payments mean less equity to start, and can make reducing your LTV a slower process.
HELOC Qualification Requirements
Home equity loans can be a little harder to qualify for, as they have variable rates, which makes them slightly riskier.
For these, you will usually need:
- Credit score: 700+ for the best terms and rates, 680+ to qualify in most cases
- Debt-to-Income ratio (DTI): 43% or lower, in most cases
- Proof of financial stability: Documented regular paychecks and bank deposits, tax returns showing steady or growing annual earnings, strong payment history with your current lender
- Equity / Loan-to-Value ratio (LTV): 15 to 20% equity, a maximum combined LTV (both mortgage loans put together) of no more than 80 to 85%
Requirements for home equity loans and HELOCs also vary by lender, so make sure to shop around if you’re worried about qualifying.
How to Improve Your Chances of Loan Approval
A low credit score can make it harder to get a home equity loan or HELOC, but there are some steps you can take to improve your chances.
You can:
- Check and fix your credit report: Pull your credit report and look for any errors. Then, dispute these with the respective credit bureau. Once they’re remedied, it could improve your score.
- Gather documentation: Get ready to prove that you’re a good candidate for a loan. Pull pay stubs, tax returns, and bank statements, and write explanation letters for any gaps or issues your lender might call into question.
- Use a co-signer or co-borrower: Bringing in a co-signer or second borrower to your loan can add credibility to your application and reduce the risk you present to the lender. Be sure to choose one with a good credit score and repayment history.
- Apply with your current lender or bank: Using an institution you already have a relationship with may offer you more flexibility when it comes to qualifying. Sometimes, they will even offer discounts on rates and fees, too.
You can also wait to apply for your loan until you improve your credit score. Work on paying down your debts, making your bill payments on time, and settling up on any overdue accounts. These moves can all increase your score over time.
Alternatives to Home Equity Loans & HELOCs
Home equity loans and HELOCs can be a good way to get cash, but they aren’t your only options.
Some other financing methods you might consider include:
- Cash‑out refinancing: A cash-out refinance can help you turn some of your home equity into cash, and if you choose a government-backed one (FHA or VA), you may be eligible for a credit score as low as 500.
- Non‑QM or DSCR programs: If you’re hoping to use the funds to buy another property or grow your investment portfolio, these specialty loans may be able to help.
- Home Equity Agreements (HEAs): These are arrangements in which you sell a portion of your home’s future value to an investor in exchange for a lump sum of cash. They come with no interest or monthly payments and typically have loose credit requirements.
- Personal loan: A financing option not tied to your home. They can be a good option if you only need a small amount and plan to pay it off quickly, as they tend to have higher interest rates.
If you’re not sure which is the best strategy for your needs, talk to a mortgage professional or financial advisor. They can point you in the right direction for your goals and budget.
Next Steps
If you’re interested in getting a home equity loan or HELOC, your first step should be to check your credit. If your score is low or there are lots of late payments, consider improving your credit before applying for a loan.
You should also calculate your home equity stake and debt-to-income ratio (DTI). This will also play into whether you qualify for a home equity loan, as well as how much you’ll be eligible to borrow.
Finally, reach out to a lender and apply for prequalification, which will give you an idea of whether you’re eligible for the loan and what rate and terms you could get. If you can’t qualify or are unhappy with the terms you prequalify for, a home equity agreement, refinance, or other financing product may be a better option.
