How to Get a Home Equity Loan With Bad Credit
By Ralph DiBugnara
Originally published by Bankrate · Bankrate Personal Finance
Your credit score doesn't have to be perfect to tap into your home's equity. While lenders prefer borrowers with scores above 700, many will work with homeowners in the 620–680 range — and some go even lower. The key is knowing what to expect and how to position yourself for the best possible outcome.
Home equity loans allow you to borrow against the value you've built in your home, typically at lower interest rates than personal loans or credit cards. Even with a lower credit score, that equity can be a powerful financial tool — if you approach it the right way.
What Credit Score Do You Need?
Most lenders require a minimum credit score of 620 for a home equity loan, though some specialized lenders will go as low as 580. The higher your score within that range, the better your rate and terms will be. Borrowers with scores below 680 should expect higher interest rates and may face stricter loan-to-value requirements.
How Much Equity Do You Need?
Lenders typically want you to retain at least 15–20% equity in your home after the loan. So if your home is worth $400,000 and you owe $280,000, you have $120,000 in equity — but a lender requiring 20% retained equity would only let you borrow up to $40,000. With bad credit, lenders may require you to retain even more equity as a buffer against default risk.
Debt-to-Income Ratio Matters Too
Your credit score is just one piece of the puzzle. Lenders also look closely at your debt-to-income (DTI) ratio — the percentage of your gross monthly income that goes toward debt payments. Most lenders cap DTI at 43%, though some will go to 50% for well-qualified borrowers. If your credit is challenged, a lower DTI can help offset the risk in a lender's eyes.
Shop Multiple Lenders
This is especially important with bad credit. Rates and terms can vary significantly from one lender to the next, and some specialize in working with borrowers who have credit challenges. Credit unions, community banks, and online lenders often have more flexible underwriting than large national banks. Getting quotes from at least three lenders gives you real data to compare.
Consider a HELOC Instead
A home equity line of credit (HELOC) works differently than a home equity loan — it's a revolving line of credit rather than a lump sum. Some borrowers with lower credit scores find it easier to qualify for a HELOC, particularly if they only need to draw funds periodically rather than all at once. The tradeoff is that HELOCs typically have variable rates, which can increase over time.
Improve Your Score Before Applying
If your timeline allows, even a modest credit score improvement can meaningfully change your loan terms. Paying down revolving balances, disputing errors on your credit report, and avoiding new credit inquiries in the months before applying can all help. Moving from a 620 to a 660 score could save you thousands of dollars over the life of the loan.
Even with a lower credit score, your home equity is a powerful financial tool. The key is knowing what lenders are looking for and positioning yourself to meet as many of those criteria as possible.
The Bottom Line
Bad credit doesn't automatically disqualify you from a home equity loan, but it does mean you'll need to work harder to find the right lender and accept that your rate may be higher than you'd like.
The equity you've built is real — don't leave it untapped just because your credit isn't perfect.
Talk to a financing specialist who can help you understand your options, compare lenders, and determine whether a home equity loan, HELOC, or cash-out refinance makes the most sense for your situation.