How to get a home equity loan with bad credit

backs the loan, home equity loans often offer lower interest rates than credit cards or personal loans. While lenders check your credit score during the application process, that’s only a piece of your financial profile. Getting a home equity loan with bad credit is still possible if you combine significant equity in your home and a stable income.

Key takeaways:

• Qualifying for a home equity loan with bad credit is possible if you have strong compensating factors like low debt and high equity.
• Lower credit scores usually result in higher interest rates, lower loan limits, and larger monthly payments.
• You can boost your approval odds by getting errors in your credit report fixed, lowering your debt, or applying with a co-signer.

Can you get a home equity loan with bad credit?

Yes, home equity loans are available to borrowers with bad credit depending on your overall financial profile. Some specialized lenders allow credit scores as low as 620 if you have strong compensating factors. Factors like substantial home equity, a high income, or a low debt ratio can compensate for a lower credit score.

What counts as bad credit?

There isn't a single universal definition of "bad credit," but lenders use standard scoring models ranging from 300 – 850. Scores below 580 are generally classified as poor credit, while scores from 580 – 669 fall into the fair credit range. Anything at 670 or higher is considered good to excellent. Fair credit gives you more borrowing options than poor credit, but both ranges can make qualifying for a traditional home loan more challenging.

How bad credit can affect your loan terms

When you apply with lower credit, lenders view the loan as a higher risk. To adjust for that risk, lenders often charge higher interest rates, which leads to larger monthly payments over time. You might also face lower borrowing limits or stricter equity requirements than borrowers with higher credit scores.

Credit requirements for Rocket Mortgage

Rocket Mortgage requires a minimum credit score of 680 for a home equity loan.¹ Rocket Mortgage offers home equity loans ranging from $45,000 – $500,000 (with a minimum loan amount of $10,000 for properties located in Michigan) with fixed terms of 10 – 20 years. Other lenders may set their own credit score minimums.

Home equity loan requirements with bad credit

To qualify for a home equity loan, lenders look at a combination of credit, equity, debt, and income factors. Reviewing these core requirements lets you know where you stand before applying.

Credit score requirements

Every lender sets its own minimum credit score for a home equity loan. Prime mortgage lenders often look for scores of 680 or higher. Some subprime or specialized lenders may approve applicants with scores as low as 620, though you'll likely pay higher rates. While there's no official government-backed FHA home equity loan, borrowers looking for flexible government options often consider FHA cash-out refinances instead.²

Sufficient equity

Your home equity is the difference between your home's current market value and the remaining balance on your mortgage. Lenders usually require you to keep 15% – 20% equity in your home after taking out the loan. If your home is worth $400,000 and you owe $300,000 on your mortgage, you have $100,000 in equity, or 25%. If your home value drops below what you owe, you have an underwater mortgage and can't borrow against your equity. You can estimate your usable equity with the Rocket Mortgage home equity calculator.

Your debt-to-income ratio (DTI)

Your debt-to-income ratio measures how much of your gross monthly income goes toward recurring debt payments. To calculate your DTI, divide your total monthly debt payments by your gross monthly income. Lenders often prefer a DTI of less than 50% for home equity loan approval. A lower DTI shows lenders that you have enough monthly income to handle a new loan payment without causing major financial strain.

Your loan-to-value ratio and CLTV

Your loan-to-value ratio (LTV) compares your current loan balance to your home's value. When you take out a second mortgage, lenders look at your combined loan-to-value ratio (CLTV), which combines your existing mortgage and your new home equity loan. At Rocket Mortgage, maximum CLTV limits depend on your credit score:

• 680 – 699 credit score: Borrow up to 80% of your home's value.
• 700 – 739 credit score: Borrow up to 85% of your home's value.
• 740 or higher credit score: Borrow up to 90% of your home's value.

Your income and employment history

Lenders require proof of a steady income to confirm you can afford your payments. You may need to submit recent pay stubs, W-2 or 1099 forms, and income tax returns from the last 2 years.

How to improve your chances before you apply

Taking proactive steps before submitting your application can strengthen your financial profile and improve your chances of approval.

Check your credit score

Review your credit reports from Equifax®, Experian®, and TransUnion® for free at AnnualCreditReport.com. Look for incorrect late payments, inaccurate account balances, or fraudulent activity that might be dragging down your score. Disputing and fixing errors on your credit report can boost your score.

Build more home equity

You can increase your equity by paying down your existing mortgage balance or making home improvements that boost your property's value. Rising local home values can also build equity automatically over time. Having more equity helps lenders feel more secure when evaluating your loan.

Write a letter of explanation

A letter of explanation gives you a chance to explain negative marks on your credit report to your lender. If a medical issue, job loss, or sudden emergency caused late payments, explaining the situation and showing that your finances are now stable can help lenders look past a lower credit score.

Shop around for lenders and interest rates

Every financial institution sets its own underwriting guidelines, rates, and fees. Comparing Loan Estimates from multiple lenders can help you evaluate the interest rate, monthly payment, and closing costs for a home equity loan. Rocket Mortgage doesn’t charge origination fees on home equity loans, which can save you money up-front.³

Consider a co-signer

Adding a co-signer with good credit and a steady income can significantly improve your application. Lenders evaluate both applicants' credit scores and income during underwriting. Keep in mind that your co-signer becomes legally responsible for repaying the debt if you miss payments.

Alternatives to a home equity loan with bad credit

If you can't qualify for a home equity loan or want to explore other financial paths, there are several other options to consider.

Home equity line of credit (HELOC)

A HELOC with bad credit works like a credit card backed by your home. Instead of receiving a lump sum, you get a revolving line of credit you can draw from as needed. When comparing HELOCs and home equity loans, remember that HELOCs usually have variable interest rates, and lenders still evaluate your credit score, equity, and income.

Personal loan

The main difference between home equity loans and personal loans is the need for collateral. A personal loan is unsecured, meaning you don't put your home up as collateral. While this protects your home from foreclosure, personal loans often come with higher interest rates and lower borrowing limits, especially if you have a low credit score.

Cash-out refinance

A cash-out refinance replaces your existing primary mortgage with a brand-new, larger mortgage. You receive the difference in cash at closing and maintain a single monthly payment. Qualification requirements, rates, closing costs, and the effect on your existing mortgage terms differ from a standalone home equity loan.

Home equity sharing

A home equity sharing agreement lets an investment company give you cash in exchange for a portion of your home's future value. These agreements don't require monthly payments and often accept lower credit scores, but you’ll have to pay the investor back when you sell the home or when the contract ends.

Risks of a home equity loan with bad credit

Borrowing against your home when you have bad credit involves distinct risks that you should weigh carefully.

Foreclosure risk

Because your home acts as collateral for the loan, failing to make your payments can lead to foreclosure, so taking on a second mortgage payment when your budget is already tight is very risky.

Higher interest rates and fees

Lenders charge higher interest rates to borrowers with lower credit scores. These higher rates increase your total borrowing costs and result in larger monthly payments over the life of the loan.

Lower borrowing amounts

Even if you have substantial home equity, a low credit score may cause lenders to restrict how much you can borrow for a home equity loan. You might not be able to borrow the full amount you need.

Risk of being underwater

If you borrow a large portion of your equity and local real estate prices decline, you could end up owing more than your home is worth. Being underwater makes it difficult to sell your home or refinance your mortgage without paying money out of pocket.

FAQ

Here are the answers to some common questions about credit and home equity loans.

What's the payment on a $50,000 home equity loan?

Your monthly payment on a $50,000 home equity loan depends on your interest rate, repayment term, and closing costs. Lower credit scores lead to higher interest rates, which directly increase your monthly payment.

What disqualifies you for a HELOC?

You can be disqualified for a HELOC if you don't meet a lender's minimum credit score, fall short on required home equity, have a high DTI ratio, or lack steady, documented income.

Does a home equity loan require an appraisal?

Yes, lenders typically require a home appraisal or another valuation method to verify your property's current market value and confirm your equity. Beware of claims for no-appraisal home equity loans, as lenders almost always need an accurate valuation before approving equity loans.

Can you get a home equity loan with bad credit and late payments?

Yes, but late payments make qualifying harder. Lenders review your recent payment history, so submitting a letter of explanation and showing recent on-time payments can help overcome late payments you’ve made in the past.

How much are closing costs on a home equity loan?

Closing costs on a home equity loan typically range from 3% – 6% of the total loan amount. These fees cover services like property appraisals, credit reports, title checks, and administrative processing.

The bottom line: You may be able to get a home equity loan with bad credit

Having a lower credit score may complicate things, but it doesn't automatically close the door to borrowing from your home equity. Lenders weigh your complete financial situation, including your equity position, income stability, and debt levels. Weighing the pros and cons of a home equity loan helps you decide if tapping into your equity aligns with your financial goals.

When you're ready to check your options, you can use the Rocket Mortgage home equity calculator to check your equity and start an application today.

¹ Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. This is not a commitment to lend.

² Rocket Mortgage is not acting on behalf of FHA or HUD.

³ Clients will not be charged the origination fee (processing fee for New Jersey) on newly originated Home Equity Loans when the rate is locked on or after August 25, 2026. Offer is only valid on retail loans. This offer cannot be retroactively applied to previously closed loans or locked loans. Additional restrictions/conditions apply. Rocket Mortgage may cancel or modify this offer at any time. This is not a commitment to lend.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, investment, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.