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Your home is more than a roof over your head. It can also serve as a tangible asset, giving you a way to build wealth over time and eventually pass it on to your heirs. And, if you’re really in a pinch, you may be able to tap into that wealth and turn it into short-term cash.
Also known as a second mortgage, a home equity loan allows you to borrow against the equity you’ve built in your property—that is, the amount of the property’s total value that you own. That equity itself secures the loan, but your other financial factors, such as your credit score, will still play a role in the qualification process.
While it’s possible to get a home equity loan with less-than-perfect credit, a poor credit score may hurt your chances of eligibility—or drive up associated costs like your interest rate.
Let’s take a closer look.
Just like when you apply for an auto loan, or credit card, your home equity loan lender will want to look at your overall financial profile to assess your ability to repay the loan over time. Even with your home on the line as collateral, traditional markers of creditworthiness, such as your credit score and debt-to-income ratio (DTI), are considered.
While every lender is different, the minimum qualification requirements for a home equity loan are generally as follows:
If your credit score leaves something to be desired, you still may be able to get a home equity loan if you’re willing to put in some worek. Here’s what to do.
Take a moment to review your credit history in full to ensure all the information is accurate. You can access your reports for free using annualcreditreport.com, which is authorized by federal law to offer yearly credit reports from the three major credit bureaus free of charge.
Review each report thoroughly. Make sure you recognize all the listed accounts and personal information—and that any factors pulling your score downward are legitimate. If something has been reported in error, you can file a dispute and have it removed from your record.
The removal of errors, along with positive credit behaviors such as making on-time payments on all open accounts, can help increase your credit score quickly.
While your credit score is important, it’s not the only figure lenders take into consideration when deciding on your eligibility for a loan. Your DTI, which shows lenders, at a glance, how much of your monthly income is already tied up in debt payments, also carries weight.
As mentioned, most home equity loan lenders want to see a DTI of 43% or less, though some may allow a slightly higher one. To calculate your DTI and see where you stand, add together all your existing debt payments, including your mortgage, and divide the total by your gross monthly income, which is how much you earn before taxes are deducted. From there, multiply by 100 to get your DTI as a percentage.
Even if your DTI puts a home equity loan within your reach, lowering your DTI—and your general level of debt—may help you qualify for better loan terms and make repaying that loan easier. If you have the resources, paying down existing debt can improve your credit score and your DTI simultaneously, while freeing up your monthly budget.
If your application factors are looking marginal and you need a home equity loan right now, you might consider asking someone you trust (and whose financial standing is a bit shinier than yours at the moment) to co-sign the loan. Think carefully before asking this favor. If you find yourself unable to make payments toward your new loan, your co-signer will be equally responsible—and their credit history could be compromised.
Not all lenders allow co-signers, so if you think you’ll need one, find a lender that offers this option.
While a home equity loan can be a good way for some homeowners to access fast cash, it’s not the only option available and with poor credit may be difficult to achieve. Even if your credit allows you to take out a home equity loan, it’s still worth considering alternatives, such as a home equity line of credit (HELOC), reverse mortgage, or cash-out refinancing, which we explore in more detail later in the article.
Every financial decision has both drawbacks and benefits to consider. Here are some of the primary pros and cons of home equity loans.
Let’s get into the details of the above-mentioned pros and cons.
Because home equity loans are secured by your property, they’re less risky to lenders—and therefore available, depending on your creditworthiness, at lower interest rates.
Of course, even a low interest rate can add up substantially over time. It’s still important to do the math and see how much you stand to pay over the entire lifetime of your loan in both principal and interest.
Unlike HELOCs—one of the main alternatives to home equity loans—home equity loans are often offered with fixed interest rates and an unchanging monthly payment. That predictability may make it an easier loan to budget for, which is important when you may be repaying the loan for over a decade.
Depending on what you’re using your home equity loan for and when you borrowed the funds, the interest may be tax deductible.
For example, if the loan is issued between 2018 and 2025 and used to make major home renovations or repairs, you may be able to deduct the interest. Alternatively, if you take out the loan after 2025, the interest may be deductible even if used for other expenses. For the most up-to-date information or if you have specific questions, consider contacting a tax professional.
No loan is without its drawbacks. Here are some of the main considerations to keep in mind when assessing whether a home equity loan is right for you.
Putting up your home as collateral lowers the risk for the lender and makes the loan more affordable. However, you can risk losing your home if you fail to make your payments. You want to be certain you’ll be able to pay back your second mortgage. Along with causing a major life disruption, a foreclosure can have a very detrimental impact on your credit score.
When you borrow against your home equity, you essentially decrease your home’s investment value until the loan is repaid—and, as discussed, home equity loans can take a long time to pay in full. Additionally, if housing prices fall, you may even end up owing more than the home is worth, which isn’t a great situation to be in, especially if you hope to sell your home.
Home equity loans can allow you to access a large sum of cash. However, just like your first mortgage, your second mortgage is subject to closing costs that could easily range between 2% and 5% of the loan total. For a $100,000 loan, that means paying between $2,000 and $5,000 upfront.
If your home equity loan application has been denied and your credit is to blame, here are some steps to consider.
Still thinking through your options? Here are some common alternatives to home equity loans.
A HELOC works very similarly to a home equity loan. However, rather than a lump sum payout, you’ll have access to a flexible line of credit you can borrow as needed against your home’s equity.
HELOCs are usually split into a draw period, during which you can borrow, and a repayment period. You may also be able to make interest-only payments during the draw period, which may free up more money in the short term but will lead to larger bills down the line.
Furthermore, HELOCs are often offered at variable interest rates, which means their monthly payments can be unpredictable and more difficult than home equity loans to budget for.
A home equity conversion mortgage (HECM), also known as a reverse mortgage, is available to homeowners age 62 or over. With this type of mortgage, payments don’t become due until the last surviving borrower permanently vacates the house or dies. This makes it an affordable loan in the short term.
However, as soon as the borrower dies, moves out permanently, or sells the home, the entire sum of the loan is due, and the burden may fall on the heirs. Furthermore, since regular payments aren’t made, the loan total goes steadily up over time. If your survivors can’t afford to repay the loan, they may wind up having to surrender the property to the lender.
Cash-out refinancing involves taking out a new mortgage loan to cover what remains of your original mortgage as well as some extra, which is withdrawn in cash.
Cash-out refinancing can be a good choice if you qualify for lower interest rates, perhaps because of the current economic climate or because your credit score has improved. However, it also increases the total amount of time it’ll take to pay off your home.
Plus, just like your original mortgage, you’ll likely need to have a third-party appraisal done. That’s just one of the closing costs you can expect to pay with this option. We recommend some good lenders for this purspose.
Whether you’re hoping to renovate your home or need cash for other expenses, a home equity loan can be a relatively low-cost way to cash in on what’s likely your largest investment. If you have poor credit, there may be ways to qualify, such as boosting your DTI, disputing errors in your credit reports, or obtaining a cosigner.
But qualifying for a home equity loan doesn’t mean you should go ahead and get one. Make sure you are aware of the risks and drawbacks and consider if there are better alternatives before you proceed.
Like any other loan or line of credit, lenders offering home equity loans check into potential borrowers’ credit histories and other financial factors. Some lenders offer home equity loans to people with credit scores as low as 620. However, the minimum threshold can sometimes be higher and potentially even reach 720.
Between a home equity loan or HELOC, neither choice is objectively better—they’re simply different. Home equity loans offer access to a lump sum of money at a fixed interest rate, ensuring predictable payments over the entire life of the loan. A HELOC, on the other hand, offers a flexible line of credit that you can borrow against as needed, although its separation into a draw period and repayment period as well as adjustable-rate interest means payments can be less predictable.
If you have poor credit, a high debt-to-income ratio, or have yet to build up 15% to 20% equity in your home, you may have trouble qualifying for a home equity loan. That said, every lender’s specific qualification requirements are different. It’s worth checking with a representative at your chosen financial institution for more details.
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