Home Equity Loan for Bad Credit: Options & Costs

For a home equity loan for bad credit, most lenders look for a credit score of about 620, with a few listing 600 and big banks higher. Lenders also test debt-to-income (usually under 43%) and combined loan-to-value (80% to 85%). A low score typically means a higher rate, a smaller loan and stricter terms, with your home as collateral.

This guide gives the numbers lenders cite, with sources and dates, explains the tests beyond the score, shows what each extra point of rate costs on a worked example, and lists what to consider if you are turned down. It is general information, not personal financial advice or a recommendation to borrow.

Can you get a home equity loan for bad credit?

Sometimes, but on narrower terms. A home equity loan lets you borrow against the equity in your home. The Consumer Financial Protection Bureau describes it as a loan secured by your home that is paid out as a lump sum and usually carries a fixed rate. It is often called a second mortgage because it sits behind your main mortgage.

LendingTree, a loan marketplace, says a lower score generally leads to a higher interest rate, a smaller maximum loan and stricter terms. The score is therefore a price and a limit as well as a pass-or-fail line, so two applicants with the same equity can be offered very different loans.

A home equity loan is a lump sum. A home equity line of credit, by contrast, is an open-end line you draw on as needed. Both are secured by the home, which is the key risk covered later in this guide.

Credit score bands and what lenders say

There is no official minimum score for a home equity loan. Each lender sets its own, and published figures change. The table lists the figures found in LendingTree's two guides, with their dates. Lender names appear only because LendingTree lists them; they are not recommendations, and nothing here is a rate quote.

Some lender figures in LendingTree's lists may refer to the lender's HELOC rather than its home equity loan, so confirm the product-specific floor with the lender. Read the table as a pattern, not a menu. The usual floor sits around 620, a few lenders list slightly lower, and large banks list higher. A score under about 600 is below every floor listed in these sources. If your credit is in that range, the realistic first step is usually improving the score or looking at the alternatives below, not shopping for the lowest advertised number.

The tests beyond your score

Credit score is only one of the tests. Lenders also check how much you already owe relative to your income, and how much of your home's value is already borrowed against. Together these decide how large a loan you can get, even when the score passes.

The debt-to-income ratio compares your monthly debt payments with your monthly income. The combined loan-to-value ratio adds your first mortgage and the new loan, then divides by the home's value. If the home is worth $400,000, an 85% combined limit means total borrowing against it of up to $340,000, including the mortgage you already have. That arithmetic is illustrative, not a lender quote.

Two worked examples of the tests

Combined loan-to-value. Suppose a home is worth $400,000 and the mortgage balance is $280,000. At an 85% combined limit, total borrowing can reach $340,000, so the most a new loan could be is $60,000 before any other test is applied. At an 80% limit the ceiling is $320,000 and the room shrinks to $40,000. The same home can support a very different loan depending on which cap a lender uses.

Debt-to-income. Suppose gross monthly income is $6,000 and existing monthly debt payments are $2,000, a ratio of 33%. If a new loan adds a payment of $660.75, the total becomes $2,660.75, which is about 44.3% of income and above the 43% level LendingTree cites as usual. How a lender counts a new payment varies, so this is an illustration of why the payment, not just the loan size, matters.

The "How to improve it" column is general guidance, not a promise. To estimate where you stand before approaching anyone, our HELOC borrowing power calculator shows how equity and the combined loan-to-value limit combine, and our home equity loan calculator shows the payment on a fixed lump sum.

What a lower score costs: a worked sensitivity

The sources say a lower score means a higher rate, but they do not give a rate for each band, so we do not either. Instead the table below shows what a one-point step in rate does to a fixed-rate loan. The rates are assumptions chosen as pure inputs, not offers or market data. The loan is $50,000 over 10 years (120 monthly payments), with payments from the standard amortisation formula.

Moving from 9% to 12% raises the monthly payment by about $84 and total interest by about $10,077 on this example. Each additional point costs roughly $27 to $29 a month and more than $3,000 in interest over the term. A higher rate also tightens your debt-to-income ratio, which can lower the amount a lender will offer in the first place. Your actual quote depends on the lender, your score and the loan terms, so treat these figures only as a way to see the shape of the cost.

Before you apply anywhere

It helps to know roughly where you stand before you apply. A sensible order is to gather your current score, list your monthly debt payments, estimate your home's value and mortgage balance, and run the numbers through the calculators linked above. If the results land well outside the figures in the tables, applying widely is unlikely to change the outcome.

If you are denied: alternatives

LendingTree lists several options for borrowers who do not meet a lender's requirements. None is risk-free, and several are also secured by your home or carry higher costs. Compare each against your actual numbers.

• A home equity line of credit. A HELOC is an open-end line you draw on as needed. Our guide to HELOC versus home equity loan compares the two, and our page on HELOC options with bad credit covers that product.
• A personal loan for bad credit. A separate product with its own rates and terms, so price it the same way as the table above before you decide.
• A debt consolidation loan. Useful only if it lowers your overall cost and monthly burden.
• Waiting while you improve your credit. Because a lower score leads to higher rates and a smaller loan, time spent lifting the score and lowering your debt-to-income ratio can change what is offered.

Questions to ask a lender before you accept an offer

Once you hold an offer, the questions below help you compare it with the assumptions in this guide. They are general good practice, not claims about any particular lender.

• What is the exact rate, and is it fixed for the whole term? The CFPB says home equity loans usually have a fixed rate, so confirm yours does.
• What is the total amount you will repay over the term, including any fees the lender charges?
• What is the monthly payment, and does it fit your budget at a lower income than today?
• Which test limited the amount offered: your credit score, your debt-to-income ratio or the combined loan-to-value cap?
• What happens if you miss a payment, and what help is available before the lender takes any action against the home?

Asking which test limited the offer is especially useful, because it tells you what to fix. If the cap was loan-to-value, paying down the mortgage helps. If it was debt-to-income, paying down other debts helps. If it was the score, time and on-time payments help most.

The risk you cannot price: your home is the collateral

The Consumer Financial Protection Bureau states that if you cannot pay back a home equity loan, the lender could foreclose on your home. Foreclosure is the legal process by which a lender takes a home to recover an unpaid secured loan. Its HELOC guidance gives the same warning in plain words: if you fall behind or cannot repay on schedule, you could lose your home.

This is why a higher rate matters more with bad credit than the payment table suggests. Fewer options and a higher cost leave less room for a missed payment. Before applying, ask what happens to your budget if your income dips for a few months, and whether the money is for something that justifies putting your home at risk. Our home equity loan calculator and the borrowing power tool above help you test a payment against your budget before you commit to anything.

This article is general information, not financial, tax or legal advice. Figures are approximate and change over time — always verify with a qualified professional or the official source before making a decision.

Written and reviewed by the HELOC Payment Calculator editorial team. Facts checked against primary sources; see the reference above.

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