Finding Home Equity Loans With Bad Credit

Where can I get a home equity loan with bad credit? 

house with question mark on top illustration

If you don't have the greatest credit, it can be a challenging to get a home loan. Unlike traditional home loans, home equity loans are more reliant on your home equity as security rather than on your credit score. So, if you have a decent amount of equity in your home and less-than-stellar credit, you may still qualify for a home equity loan. Instead of just looking at your credit score, lenders might look at factors like your employment history, your history of responsible credit use, and the amount of equity you have in your home. 

What kind of credit score do you need to get a home equity loan 

Generally, if you have a credit score above 680, it should be relatively easy to get a home equity loan. If you're below 680, things start to get a little tougher, but there are still a lot of options. In fact, many lenders offer these loans to borrowers with credit scores as low as 620. If your credit score is below that, though, you may want to work on improving your credit before seeking out a home equity loan. Plus, it's always important to check your credit score for any errors or omissions. According to the Federal Trade Commission (FTC), one in five Americans may have errors on their credit report-- something which could seriously affect their score. 

What you need to qualify for a home equity loan with bad credit 

If your credit isn't great, you'll have to be even more meticulous when it comes to providing documentation to your lender. In many cases, that documentation will include: 

  • Your latest tax returns

  • Proof of income and employment

  • Home value and appraisal information

  • Proper homeowners insurance documentation

In addition to looking at your financial documentation, lenders also look at your debt-to-income ratio (DTI), and your loan-to-value ratio (LTV). DTI is calculated by taking the amount of debt you owe each month on things like car payments, student loans, and mortgage payments and dividing it by your monthly income, while LTV is calculated by dividing the amount you owe on your home by the amount your home is worth. For DTI, most lenders prefer ratios under 43%-- and a DTI of 45% is often the maximum ratio permitted if you want to get a home equity loan. For LTV,  most lenders usually prefer a ratio under 85%, but this has become more flexible in recent years. 

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