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I know how frustrating it is to try to get a home equity loan when your credit score is between 620 and 679. You've built up a lot of equity in your home—maybe $80,000, $120,000, or even $200,000—but traditional lenders keep bringing up your credit history as a problem. The truth is that home equity loans for people with bad credit are possible. They're just harder to get and cost more when you do qualify.
Bankrate's data from January 2026 shows that the average interest rate on home equity loans for people with good credit is between 8.10% and 8.16%. If your score drops below 680, you could pay 9.5% to 11% more, depending on how low your score is and which lender you choose. That difference in rates costs real money. The difference between 8% and 10% interest on a $50,000 loan over 15 years is about $5,200 more in interest payments. This means that having bad credit doesn't mean you can't get a loan, but it does mean that approval depends on other things, like having a lot of equity, a steady income, and a low debt-to-income ratio.
When lenders work with subprime borrowers, they don't care about your credit score if they see that you're doing well in other areas of your finances. I've worked on projects where our team helps borrowers deal with this kind of problem. It's clear that borrowers who plan ahead before applying usually get better terms than those who rush into applications without thinking. Let me show you the ten best strategies that really work.
Not later, but now. You can get free credit reports from all three bureaus—Experian, Equifax, and TransUnion—through AnnualCreditReport.com. Stay away from credit monitoring sites that might charge you or ask for a credit card. The federal site is really free, and it gives you reports from all three bureaus once a year. When you get these reports, you're looking for mistakes that are unfairly lowering your score. Some common mistakes are accounts that you paid off but still show balances, payments that were actually made on time but were reported as late, collections for debts you paid off years ago, and credit limits that are reported as lower than they really are.
Fight every mistake you find. You can upload supporting documents to each bureau's online dispute portal. If you paid off a credit card with a $5,000 balance and it still shows that amount, upload your final payment confirmation or a recent statement that shows a $0 balance. If the late payment marker is wrong, send proof of on-time payment, like a canceled check or a bank statement showing the date of the payment. The bureau has 30 days to look into the dispute. They get in touch with the creditor who gave them the information and ask them to confirm it.
The bureau has to take the information off your report if the creditor can't verify it within 30 days. The Federal Trade Commission says that about 20% of people who dispute mistakes on their credit reports see their credit scores go up after the mistakes are fixed. What really matters: Last year, our team helped a borrower whose credit score went from 638 to 671 after she successfully disputed three mistakes: a paid-off medical collection that was still showing as open, a credit card limit that was reported as $2,000 when it was really $8,000 (which made her utilization look much higher than it really was), and a late payment from 2022 that her bank statements showed she made on time. That 33-point rise in her score moved her up a rate tier, which saved her about 0.75% on her interest rate. The catch is that you have to start this process at least 60 to 90 days before you want to apply for a home equity loan. Disputes take time, and you want lenders to see the changes in your credit reports before they look at them.
Credit utilization accounts for 30% of your FICO score calculation. It measures how much of your available credit you're actually using across all your credit cards. If you have three credit cards with combined limits of $20,000 and you're carrying $12,000 in balances, your utilization is 60%-which screams risk to lenders. The sweet spot is below 30% total utilization, but dropping below 10% creates even bigger score improvements. On that same $20,000 in total limits, getting your balances down to $6,000 (30%) or ideally $2,000 (10%) signals to lenders that you're not maxed out and desperate for credit. Here's the strategy: focus your available cash on paying down the cards with the highest utilization percentages first, not necessarily the highest interest rates. A card with a $1,000 limit and a $950 balance (95% utilization) is killing your score more than a card with a $10,000 limit and a $5,000 balance (50% utilization), even if the second card has a higher interest rate. Work the math on each card. Calculate current balance divided by credit limit. Rank them by utilization percentage. Pay down the worst offenders first until you get them all below 30%, then focus on getting them below 10% if you have additional funds available.
According to Experian research from 2025, consumers who reduced utilization from above 50% to below 30% saw average credit score increases of 25-40 points. Those who got below 10% saw increases of 35-60 points. These aren't small movements-they're the difference between denial and approval, or between a 10% rate and an 8.5% rate.
Practical example: Maria had $8,500 in credit card debt across four cards with $15,000 total limits (57% utilization). Her credit score was 641. She got a small bonus at work and put $3,500 toward her cards, strategically paying off the two smallest cards completely and paying down the highest-utilization card from 90% to 45%. Her new total balance was $5,000 on $15,000 limits (33% utilization).
Within one billing cycle, her score hit 668. Two months later with another payment, she reached 682. She qualified for a home equity loan at 9.25% instead of the 10.5% she would have gotten at 641-saving her $63 monthly or $11,340 over the 15-year term. Timeline: credit card companies report balances to credit bureaus once monthly, usually on your statement closing date. Make your payment before that date, and the lower balance reports. You'll see score improvements within 30-60 days of reducing utilization.
When you have bad credit, your home equity percentage is more important than almost anything else. When lenders see a lot of equity protecting their investment, they are more likely to lend to subprime borrowers. They want to know that they will get their money back if your home value goes down or you default. To get an accurate picture of your equity, take the current market value of your home, multiply it by 0.80 (the typical maximum LTV), and then subtract the balance of your mortgage. That's the most you might be able to borrow.
For example, if your home is worth $380,000, the most you can borrow is $304,000. You can borrow up to $19,000 if you owe $285,000 on your mortgage. That's not a lot of equity. You have 25% equity ($95,000 raw equity), but lenders want you to keep 20% equity after the loan, which makes it hard to borrow money. Better case: With a home worth $380,000 and a mortgage balance of $228,000, you have 40% equity, which is $152,000 in raw equity. If your LTV is 80% ($304,000), you could borrow up to $76,000. That's a significant amount of money to borrow.
If you have 15% equity, you have three ways to get to 20% before you apply:
Option 1: Wait and pay off your mortgage. Every month you make a payment, you lower the principal and raise the equity. Depending on how much you pay each month and how much you still owe, it could take you 6 to 18 months to reach 20% equity just by paying down the principal.
Option 2: Wish for your home to go up in value. According to the National Association of REALTORS®, if your local market is growing at a rate of 3–4% per year, a $350,000 home could be worth $10,500–$14,000 more in one year. That could raise your equity from 18% to 22% or 23% without you having to make any more mortgage payments.
Option 3: Pay extra on the principal. If you can afford to make extra payments on your mortgage that only go toward the principal, even $500 to $1,000 a month will help you build equity much faster. Extra payments could help you build the extra equity you need in 6 to 12 months. When a lender sees 30–40% equity and a 640 credit score, the equity makes up for the credit risk. This is important if you have bad credit.
The Mortgage Bankers Association says that in 2025, subprime home equity loans with 30% or more equity had a default rate of only 2.1%, while loans with 20% to 25% equity had a default rate of 5.8%. These numbers are known to lenders, and they set their prices based on them. AmeriSave's underwriting team often approves borrowers with credit scores between 660 and 680 when they have at least 30% equity. This is because the loan-to-value ratio gives them a lot of protection against risk. Think of equity as your bargaining chip. It's what lets you get approval even if your credit isn't perfect.
Your DTI ratio tells lenders whether you can afford the new payment on top of everything else you owe. Calculate it by adding up all monthly debt payments (mortgage, car loans, student loans, credit cards, personal loans, child support, alimony) and dividing by your gross monthly income before taxes. Example: $2,200 mortgage, $450 car payment, $280 student loans, $350 credit card minimums = $3,280 total monthly debt. Gross income $8,000 monthly = 41% DTI.
That's acceptable for most lenders, though you're cutting it close. If your DTI sits above 43%, lenders start getting nervous. Above 50%, most won't approve you regardless of equity or credit score. The concern is simple: if you're already spending half your income on debt, adding more debt increases default risk substantially. Strategies to reduce DTI:
Strategy 1: Pay off smaller debts completely. A $180 personal loan payment you can eliminate frees up monthly cash flow and drops your DTI. On that $8,000 monthly income example, eliminating $180 in debt drops DTI from 41% to 38.75%-noticeable improvement.
Strategy 2: Increase your income through overtime, side work, or a raise. If you can document an extra $1,000 monthly through consistent overtime or side gig income (need two years of history for self-employment income, but W-2 overtime counts immediately), your DTI calculation improves. $3,280 debt divided by $9,000 income = 36.4% DTI instead of 41%.
Strategy 3: Refinance existing debt to lower payments. If you have a high-rate car loan at $520 monthly, refinancing it to extend the term and drop the payment to $380 might reduce your DTI enough to qualify for the home equity loan. Yes, you'll pay more total interest on the car, but if it lets you access better terms on your home equity loan, the math might work in your favor.
Strategy 4: Wait to apply until after you pay off debt that's almost finished. If your car loan has 8 months left at $395 monthly, waiting those 8 months eliminates that payment from your DTI calculation. That's a 5% DTI reduction on $8,000 monthly income. Sometimes patience saves money.
Real numbers: a borrower with $4,000 in monthly debts and $8,500 income sits at 47% DTI-too high for most home equity lenders. If she pays off $500 in small debts and increases her income by $500 monthly through consistent documented overtime, her new calculation is $3,500 debt divided by $9,000 income = 39% DTI. She just moved from automatic denial to strong approval territory.
The sweet spot: below 36% DTI is ideal. Between 37-43% is acceptable with compensating factors like strong equity. Above 43%, you need exceptional equity (40%+) and credit scores closer to 680 to offset the risk.
Different lenders look at bad credit in different ways. Wells Fargo, Bank of America, and Chase are big banks that usually have strict underwriting algorithms that automatically turn down applications that don't meet certain credit requirements. They get thousands of loan applications every month and need faster ways to approve them. Credit unions work in a different way. They are not-for-profit, member-owned organizations that can make underwriting decisions that are more flexible. If a credit union loan officer sees reasons to do so, they can approve loans that don't fit the standard mold.
Data from the Credit Union National Association in 2025 showed that credit unions approved 18% more home equity loan applications from borrowers with credit scores between 620 and 679 than big banks did. Finding credit unions: look up credit unions in your area and see what their membership requirements are. Some require you to live in certain counties, work for certain companies, or be a member of certain groups. Some groups have a wide membership, like "anyone who lives, works, or worships in [State]."
To join, open a simple savings account with $5 to $25, then apply for the home equity loan as a member. Another good choice is to use an online lender. Companies like Figure, LendingTree partners, and specialized non-bank lenders only lend money for home equity. They often use a different kind of underwriting that puts more weight on income and equity than on credit scores. Their algorithms are made to approve non-traditional borrowers, not loans that are acceptable to the general public. LendingTree's research from late 2025 found that online lenders approved home equity loan applications for borrowers with credit scores between 620 and 659 at a rate of 34%. Traditional banks, on the other hand, only approved 19% of applications for the same credit tier.
The trade-off? Online lenders charged 0.5% to 1.0% more in interest than banks for borrowers with similar credit histories. Shopping tip: Apply to at least three different types of lenders over the course of 14 days. If you apply for a home equity loan and get a lot of credit inquiries in a short amount of time, they will all count as one inquiry on your credit report. Get a Loan Estimate from each lender that shows the interest rate, APR, monthly payment, and closing costs. Look at more than just interest rates when making a decision. One coworker said that a borrower with a credit score of 652 was turned down by his main bank but approved by a local credit union the same week. The credit union needed 25% equity instead of the bank's 20%, but he easily qualified because he had 32% equity. The credit union's rate was 9.1%, while the bank's rate was 9.3%. The bank had already turned him down, so he had seen the rate sheets. It can make a big difference to try a different type of lender.
Don't think that being turned down means you don't qualify. It could just mean that that lender's underwriting isn't right for you. Keep looking until you find the right one.
A co-signer essentially lends you their creditworthiness. When you add someone with 720+ credit and stable income to your application, lenders evaluate the loan based on both of your financial profiles. The co-signer's strong credit offsets your weak credit, improving approval odds and potentially securing better interest rates. Co-signers are equally responsible for the debt. If you miss payments, lenders pursue them. If you default completely and the home goes into foreclosure, the deficiency judgment hits their credit too. This is serious commitment—they're putting their financial future at risk to help you.
Who can co-sign: typically parents, siblings, adult children, or close friends with strong credit and stable income. The co-signer must have:
The co-signer doesn't need to live in the home or have any ownership interest in it. They're simply guaranteeing repayment. However, not all lenders allow co-signers on home equity loans, so ask upfront before wasting time on applications. Benefits: a borrower with a 635 credit score and a co-signer with a 745 score might qualify for rates closer to the 745-score tier—potentially 8.5% instead of 10.5%. Over a $60,000 loan for 15 years, that 2-point difference saves $13,320 in interest. That's substantial savings that could help you pay off the loan faster or fund other financial goals.
Risks and considerations: co-signing damages relationships if things go wrong. If you and your co-signer are family, a default doesn't just hurt their credit-it creates lasting family tension. Be absolutely certain you can make the payments before asking someone to co-sign. Show them your budget, your payment calculation, and your plan for what happens if you lose your job or face unexpected expenses.
Alternatives to co-signers: some lenders offer "pledged asset" programs where a family member pledges their own home equity or bank accounts as additional collateral rather than co-signing. This provides the lender additional security without putting the family member's credit at risk from your payment behavior.
Reality check: co-signers help marginally qualified borrowers get approved, but they don't turn unqualified borrowers into approved ones. If your credit is 580 with 50% DTI and 15% equity, a co-signer won't fix the fundamental issues. Co-signers work best when you're just barely missing the cutoff-like a 655 credit score when the lender wants 660, or 44% DTI when they want 43%.
It's not just algorithms that look at your loan application; it's also people. Underwriters want to know what happened and if it is likely to happen again when your credit report shows late payments, collections, or other bad marks. A well-written letter of explanation can change a "no" to a "yes" by giving more information.
What to put in your letter: In the first paragraph, tell exactly what happened. "I lost my job at TechCorp in March 2023 because the company was having a hard time." I was out of work for six months, which caused me to miss credit card payments and have one collection account go to charge-off.
In the second paragraph, tell us what you did to fix the problem. "I got a new job in September 2023 that paid me 12% more. I set up payment plans for all of the accounts that were late right away, and I paid off the collection in full by February 2024.
Show that you are financially stable right now in the third paragraph. "I have made all of my payments on time for 27 months in a row, starting in January 2026, since going back to work. I also saved $8,500 to build a three-month emergency fund so that I won't have any more problems in the future.
Finally, ask for consideration. "I know that my credit history shows this hard time, but my current financial stability and 28% equity in my home show that I can responsibly pay back this home equity loan." Be honest, short, and to the point. Don't blame others or make excuses. Don't cry or beg. Just give facts that show a temporary hardship followed by proof of recovery.
When explanation letters are useful:
A natural disaster that caused temporary financial chaos Fannie Mae's underwriting guidelines, which home equity lenders often use, say that explanation letters must come with proof. If you say you have a medical emergency, you need to send in your hospital bills and an explanation of benefits. If you mention losing your job, include your termination letter and paperwork for your new job. If you mention divorce, you should include the divorce decree that shows when it was final.
Real effect: A borrower with a credit score of 648 and three 30-day late payments on credit cards from 2023 worked with our team. In his explanation letter, he talked about being unemployed for four months because the industry was shrinking. He also included his termination letter, a new job offer letter with a 15% pay increase, and 18 months of perfect payment history since he started working again. The underwriter approved his loan at the normal terms for his credit tier instead of turning him down right away. The letter made the difference.
Format: Write the letter on plain paper in a professional way, sign it, date it, and put your full legal name and loan application number at the top. Make sure it's no more than one page. Send the supporting documents separately. Send everything along with your loan application.
If you keep getting turned down for regular home equity loans, FHA cash-out refinancing might be easier to get. These loans are backed by the Federal Housing Administration, and their credit requirements are not as strict as those of regular home equity loans.
Lowest credit score: FHA cash-out refinancing will accept credit scores as low as 580 if you put down 3.5%. For purchases, the lowest score is 500–579 with a 10% down payment. Most lenders, on the other hand, want a score of at least 580 for cash-out refinancing. According to HUD rules from 2026, the national minimum is 500, but lenders can set higher overlays. Most lenders want you to have a credit score between 580 and 620 to get cash-out refinancing.
You don't get a second mortgage (home equity loan); instead, you get a new, bigger FHA mortgage to take the place of your current first mortgage. You get cash for the difference between the amount of your old mortgage and the amount of your new mortgage. For instance, your house is worth $320,000, but you owe $210,000. You can borrow up to 80% of your home's value when you refinance with FHA. This means you can get a new mortgage for $256,000 (80% of $320,000). After paying off your $210,000 mortgage, you get $46,000 in cash.
Advantages of bad credit home equity loans over regular home equity loans:
If you got a 3% rate in 2021 and rates are now 7%, this is a big deal.
HUD's website has information about what they are in your area. When it makes sense to get cash out of an FHA loan: If your current mortgage rate is already high (6% or more), refinancing won't hurt too much. If you need to borrow a lot of money compared to your equity, the 80% LTV might give you more money than a regular home equity loan with a CLTV of 75% to 80%.
FHA's standards are easier to meet if your credit score is below 640. When not to use FHA cash-out: It costs a lot to refinance and lose your low mortgage rate (less than 5%). If you only need to borrow a small amount of money, it's not worth the trouble and cost of refinancing your whole mortgage. A simple home equity loan is better.
According to the Mortgage Bankers Association, FHA cash-out refinancing made up about 8% of all cash-out refinances in late 2025. But for people with credit scores below 680, it made up almost 35% of cash-out refinances. The program does what it was meant to do: it helps people with bad credit get to their money. The process of applying for a full mortgage refinance is similar to that of a home equity loan, but it is more difficult. You will need two years' worth of tax returns, 60 days' worth of pay stubs, two months' worth of bank statements, a full appraisal, and title work. It usually takes 30 to 45 days from the time you apply to the time you close.
Sometimes the smartest move is patience. If you're sitting at a 635 credit score, waiting 6-12 months while actively improving your credit could save you $8,000-$15,000 in interest costs over your loan term. That's real money worth waiting for. Credit improvement timeline-what to expect: 30-60 days: Paying down credit utilization and having corrections made to credit reports typically show score improvements within 1-2 billing cycles.
This is your fastest path to better scores if you have cash to pay down balances or errors to dispute. 90-120 days: Establishing new patterns of on-time payments starts showing positive impact after 3-4 months of perfect payment history. If you missed payments 18 months ago but have been perfect since, those old issues fade in importance as recent perfect history builds.
6-12 months: Significant score improvements require sustained positive behavior over time. According to FICO, adding one year of perfect payment history to a previously troubled credit file can boost scores by 40-80 points depending on other factors. This timeline works if you can wait.
Actions during your waiting period:
Month 1-2: Pull credit reports, dispute all errors, pay down credit cards to below 30% utilization, set up automatic minimum payments on every account to avoid any new late payments.
Month 3-4: Pay down credit cards further toward 10% utilization if possible, make extra principal payments on any small loans to eliminate them, avoid applying for any new credit.
Month 5-6: Continue perfect payment pattern, check credit scores to see improvements, start researching lenders and preparing documentation.
Month 7-9: If scores improved to target range (660-680+), begin shopping for home equity loans. If not, continue the pattern for another 3-6 months.
Month 10-12: Apply for home equity loans with stronger credit profile, potentially qualifying for rates 1-2 percentage points better than 6-12 months earlier.
Real cost comparison: borrower with 635 credit score qualifies for $50,000 home equity loan at 10.5% interest over 15 years = monthly payment $553, total interest $49,540. Same borrower waits 10 months, improves score to 685, qualifies for 8.5% interest = monthly payment $491, total interest $38,380.
Savings: $62 monthly, $11,160 total. That's $11,160 earned by waiting 10 months and doing the work to improve credit.
Psychology of waiting: it's hard when you need money now. But if the need isn't truly urgent-if you're consolidating debt, that's not in collections, or planning home improvements that can wait, or building an emergency fund that you don't have immediate plans for-patience pays. Run the numbers on your specific situation to see whether waiting makes financial sense.
When waiting doesn't make sense: true emergencies don't wait. If your roof is actively leaking and causing damage, or your HVAC system died in July, or you have medical bills going to judgment, sometimes you need to accept the higher rate and proceed. You can always refinance later when your credit improves.
Lenders don't just look at your three-digit credit score. They're looking at all of your financial information to figure out how risky you are. You can improve your weak points before you apply if you know what they're looking for.
The five main things that lenders look at are:
Factor 1: Your payment history on your current mortgage. This is the most important thing. Lenders know you care about paying your mortgage on time if you have collections or late payments on credit cards, but your mortgage payment history is perfect for the last 12 to 24 months. Freddie Mac's underwriting data shows that borrowers with perfect mortgage payment histories but bad credit scores default at half the rate of borrowers with similar scores but missed mortgage payments in the past.
Factor 2: How long you've been at your current job and in your field. Lenders want to see that you've been in your current job or field for at least two years. Even if your income went up, job hopping raises red flags because it could mean that your income is unstable. Borrowers who are self-employed need to show that they have had steady income for the last two years on their tax returns.
Factor 3: Money left over in savings after closing. After you get your home equity loan and pay the closing costs, some lenders want you to have 2 to 6 months' worth of PITIA (principal, interest, taxes, insurance, and association fees) payments in cash. This rule makes sure you have a safety net in case of an emergency. Having $14,400 in savings shows that you have enough money to protect both you and the lender if your PITIA is $2,400 a month.
Factor 4: The reason for the loan and how you'll use the money. Lenders like debt consolidation better than buying luxury items. Using home equity to combine $40,000 in credit cards from 22% to 9% shows that you know how to manage your money. People are worried about their financial priorities when they use it to buy a boat. You don't have to show exactly how you'll spend the money, but the reason you give for needing it affects whether or not you get it.
Factor 5: The type and condition of the property. People take better care of single-family homes than condos or manufactured homes. Properties that are in good shape are worth more and show that you should take care of your investment. If your appraisal shows that you need to do a lot of repairs or put off maintenance, lenders will be worried that you won't have enough money to pay for both the house and the loan.
Optimizing your profile:
Now that you know what lenders look at, make each area stronger before you apply:
The big picture: lenders don't want to turn you down. They're trying to figure out if you'll be able to pay back the loan. They can confidently approve that loan when they see a 645 credit score, 30% equity, a perfect mortgage payment history, five years at the same job, $25,000 in savings, and a plan to combine high-interest debt. The credit score is only one piece of information in a bigger picture. AmeriSave's underwriting method looks at more than just credit scores; it looks at the whole borrower. When other things make up for it, we often approve borrowers with bad credit. The most important thing is to make your application show off your strengths while also being honest about the things you still need to work on.
If you have bad credit, getting a home equity loan is harder than it is for people with good credit scores. But it's not impossible if you know what lenders are looking for and how to make your application stand out. When you have a lot of home equity (more than 20%), a debt-to-income ratio below 40%, and a steady job with steady income, credit scores in the 620-679 range become less important in final underwriting decisions.
People with bad credit who are able to get approved are those who take 60 to 90 days before applying to fix mistakes on their credit reports, pay off credit cards that are being used too much, get explanation letters with proof, and shop around with different types of lenders, including credit unions and online lenders that work with people who don't fit the mold. They know that their interest rates will be 2 to 4 percentage points higher than those of prime borrowers, which will cost them thousands more over the course of a 15-year loan.
However, they are willing to pay these extra costs in order to get access to equity before their credit fully recovers. If your credit score is less than 640, your debt-to-income ratio is more than 45%, or your home equity is less than 20%, you should think about waiting 6 to 12 months to improve these things before applying. The interest savings from better loan terms can often be more than $10,000 over the life of the loan, so being patient is very important.
If you have bad credit, you might have better luck getting approved for and getting better terms on FHA cash-out refinancing than on a traditional home equity loan. However, you will lose your current mortgage rate, which is a big deal if you locked in rates below 5% in the past.
At AmeriSave, we work with borrowers of all credit levels. We can help you figure out if your current financial situation is good enough to get a home equity loan or if it would be better to wait until your compensating factors are stronger. Getting professional advice before applying will help you avoid wasting hard inquiries on applications that are likely to be denied. It will also help you plan when to access your home's equity at the best possible terms given your current situation.
Most lenders want a credit score of at least 620 to 680 for home equity loans. 620 is the lowest score that flexible lenders like credit unions will accept, and 680 is the score that most banks prefer. Bankrate and LendingTree data from January 2026 show that only 15–20% of lenders will approve home equity loans for borrowers with scores below 640. To get approved, borrowers usually need to have compensating factors like 30% or more equity and debt-to-income ratios below 36%. A 20-point increase in your credit score usually means that your interest rates will be 0.25–0.5% lower. Over a 15-year loan term, this can save you thousands of dollars.
It is very hard to get a traditional home equity loan with a 580 credit score. Only a few specialized subprime lenders will even look at applications in that range, and their rates are usually higher than 12–14%, which makes them too expensive. FHA cash-out refinancing, which accepts credit scores as low as 580, personal loans from lenders who work with subprime borrowers, or waiting 6–12 months to raise your credit score above 620, where there are many more options, are all better options. If you really need to get equity with a score of 580, think about whether the emergency is worth the very high interest rates you'll have to pay. Sometimes the answer is yes for real emergencies, but most of the time it's better to wait and improve your credit.
Your ability to borrow money with bad credit depends more on your home equity percentage and debt-to-income ratio than just your credit score. Most lenders set the maximum loan-to-value ratio at 80% for borrowers with credit scores between 620 and 679, which means you need at least 20% equity left after the loan. You could borrow up to $40,000 on a $400,000 home with a $280,000 first mortgage at 80% CLTV ($320,000 maximum minus $280,000 existing mortgage). But your debt-to-income ratio also sets a limit. If adding the home equity loan payment would raise your DTI above 43%, lenders will lower the amount they approve until you're below that limit, no matter how much equity you have.
FHA cash-out refinancing will accept credit scores as low as 580 and usually has better rates than subprime home equity loans. However, you will lose your current mortgage rate. Personal loans don't need home equity, but they usually have higher interest rates, between 12% and 18% for subprime borrowers, and most lenders won't lend more than $25,000 to $50,000. HELOCs are more flexible than home equity loans, and some lenders have credit requirements that are a little less strict, starting at 600–620. However, variable rates make it hard to know what your payments will be. You can use credit cards for smaller amounts under $10,000, but they charge 18–24% interest, which makes them expensive for anything that isn't a short-term need that you can pay off in 12–18 months.
For people with bad credit, the process usually takes 30 to 60 days from application to funding. This is 1 to 2 weeks longer than for people with good credit because underwriters need more time to look over explanation letters, check employment more thoroughly, and look over factors like equity and income that might help them. You can speed up the process by getting all the paperwork ready before you apply. This includes two years' worth of tax returns, two months' worth of pay stubs and bank statements, homeowners insurance declarations, the most recent mortgage statement, and letters explaining any credit problems. Most applications take 1 to 2 weeks for appraisals, which is the longest wait time. To speed things up, be flexible with the appraiser's schedule and make sure your home is easy to get to.
When you apply for a home equity loan, a hard inquiry is made on your credit report. This usually lowers your score by 5 to 10 points for a short time, but the effect wears off in 3 to 6 months and goes away completely after 12 months. When you first open a new loan account, it lowers your average age of accounts, which can lower your scores by another 5 to 15 points. However, this effect is usually small. Making regular, on-time payments shows that you are creditworthy and can raise your score by 30 to 60 points over a 12- to 24-month period of perfect payment history. If you use a home equity loan to pay off credit card debt with high interest rates and then keep those cards open with low balances, your score may go up right away because your overall credit utilization will go down.
Most lenders won't approve home equity loans for four years after a Chapter 7 bankruptcy. For a Chapter 13 bankruptcy, the wait time is two to four years, depending on whether the case was dismissed or discharged. After a foreclosure, the waiting period can be anywhere from 3 to 7 years, depending on the lender and the reasons for the foreclosure. Conventional loans usually require 7 years, while FHA cash-out refinancing may only need 3 years if the borrower's credit is significantly improved. During the waiting period, focus on rebuilding your credit by making all of your payments on time, keeping your credit utilization below 30%, and keeping track of your stable income and job. Borrowers who are approved after bankruptcy or foreclosure usually need credit scores above 680 and a lot of equity (30% or more) to make up for what happened in the past.
It only makes sense to use a home equity loan to pay off other debts if you promise not to add to your credit card debt after you pay it off. This is because the main risk is turning unsecured debt into secured debt, which puts your home at risk of foreclosure. The math works: replacing $35,000 in credit card debt at 22% APR with a home equity loan at 9% saves you about $380 a month and about $42,000 in interest over time, which makes it very appealing. A home equity loan with a 9% APR saves about $380 a month and $42,000 in interest over time, which makes it very appealing. But research from the Consumer Financial Protection Bureau shows that about 30% of people who combine credit card debt with home equity loans or cash-out refinancing end up running their cards back up within three years. This means they have to pay both the home equity loan and the new credit card debt. You should only consolidate if you can honestly promise to close your cards, cut them up, or only use one card with a low limit for emergencies.
You should look at the annual percentage rate (APR) instead of just the interest rate. The APR includes both the interest and the fees, so it shows you the true total cost. For example, a loan with 9.25% interest and $2,500 in closing costs might have a higher APR than a loan with 9.5% interest and $800 in costs. To find out how much you'll pay over the life of the loan, multiply your monthly payment by the number of payments and then compare those totals across lenders. Look at closing costs as a percentage of your loan amount. Anything over 5% is too high, while 2–3% is reasonable. Be careful of lenders who charge large origination fees that are more than 1% of the loan amount. Check the fine print for prepayment penalties. These fees make you pay more if you pay off the loan early, and they keep you in the loan even if you want to refinance when your credit score goes up.
Get two years' worth of full tax returns, including all schedules and W-2s or 1099s; two months' worth of consecutive pay stubs showing year-to-date earnings; two months' worth of bank statements for all accounts showing consistent balances; a homeowners insurance declarations page with enough coverage amounts and the lender listed as the mortgagee; and your most recent mortgage statement showing the current balance and payment status. Also, write letters explaining any credit problems that show up on your credit report, such as late payments, collections, charge-offs, judgments, bankruptcies, or foreclosures. Include proof of how you fixed each problem. Lenders will average your two-year income to figure out your qualifying income, so self-employed borrowers need two years' worth of business tax returns, including all schedules, a year-to-date profit and loss statement, and business bank statements.
Once the money from a home equity loan is in your bank account, you can use it for anything you want without getting permission or being watched by the lender. This includes paying off debt, making home improvements, going to school, paying medical bills, running a business, going on vacation, or just keeping it in savings. Lenders do look at the purpose of the loan when deciding whether to approve it. They see some uses as lower risk than others. For example, debt consolidation and home improvements are seen as financially responsible, while discretionary spending raises red flags. The main restriction is that you can't deduct the interest on a home equity loan if you use the money for anything other than major home improvements that raise the value of your home. This is because the Tax Cuts and Jobs Act of 2017 changed the rules.
If you miss a payment, you usually have to pay a late fee of 3–5% of your monthly payment amount and all three credit bureaus will report that you were late for 30 days. This can drop your credit score by 60–100 points, depending on your current score and history. If you miss two payments in a row, you will be considered 60 days late and will have to pay extra fees. The lender may also send you notices saying that if you don't pay, they will start foreclosure proceedings. The lender can start foreclosure after 90 to 120 days of not paying because your home is the collateral for the loan. However, the time it takes to complete foreclosure varies by state. In judicial foreclosure states, it can take 6 to 18 months, while in non-judicial states, it can take 60 to 120 days. If you know you'll have trouble making your payments, call your lender right away.Many companies will let you temporarily stop making payments, change your payment plan, or set up a workout plan before you miss payments. However, these options are no longer available once you are significantly behind on payments.
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