Can you get a home equity loan with bad credit? Homeowners with bad credit history might want to know if a home equity loan or HELOC is also available to them. We discuss this topic in detail and provide the clear answers you’re searching for. 

So, can homeowners with bad credit get home equity loans?

First, What really is home equity?

Equity is defined as your asset minus the amount of debt attached to those assets. Therefore, home equity is the amount of money you own in your home outright by subtracting your mortgage balance. 

For example, if you have a home worth £200,000 and a mortgage of £100,000, you therefore have £100,000 of equity in your home, which can also be expressed as a percentage. In this case, it would be 50%. 

When calculating home equity it is essential that you use the current market value of the property rather than the amount you bought it for. Property values can change quickly and using an outdated value will give an incorrect home equity calculation. 

What are home equity loans and HELOCs?

It’s possible to leverage some of the home equity you have built up through credit. Two of the most common ways of accessing your home equity is through:

  1. A home equity loan
  2. A home equity line of credit

A home equity loan is a type of loan that uses the equity in your home as collateral if you do not make payments as agreed. If you have multiple missed payments, the lender can start foreclosure processes, which means being forced to sell the home and pay back what you owe. 

However, because you are securing the loan against the equity, you can usually borrow a larger loan amount compared to personal loans with a lower interest rate. How much home equity you can leverage will depend on your loan to value ratio and other factors. In general, you might be able to get a home equity loan equal to 80-85% of your home equity. This means having £100,000 equity could enable you to get a loan for as much as £85,000 in one lump sum payment. 

A home equity line of credit (HELOC) is a little different. It utilises your available property equity the same, but instead of giving you a lump sum, it provides you with a credit line that can be accessed over a ‘draw period’. This means you can withdraw money from your HELOC in a similar way as you take money from credit cards. Generally, you’ll only pay loan interest during the draw period, which can last year. Once the draw period is over, you will repay the loan capital and ongoing variable interest. 

What are home equity loans used for?

Home equity loans and HELOCs don’t typically come with restrictions on what the cash is used for. Some lenders may ask you what you plan on doing with the money, but it doesn’t usually have an effect on the application outcome. 

Some of the common reasons to access the equity in a property are:

  1. Home renovations

Arguably the most common reason is to make home improvements. We’re not just talking about a lick of paint here and there. Due to the significant amount of money available through these loans (for some homeowners) you may be able to use them for home extensions, loft conversions, new conservatories and more.

This can be a smart plan because it simultaneously can increase the market value of the property and increase your home equity again. 

  1. Pay off a mortgage/ get another one

If the interest rates on home equity loans are lower than your existing mortgage, you could use the cash to pay off your mortgage and save some money. Moreover, you could use the cash as a downpayment on a new mortgage for a second home. Lenders will assess your loan to value ratio and your debt to income (DTI) ratio before agreeing to this sort of arrangement. 

  1. Debt consolidation

Consolidating your debts is when you take out a loan and use the money to pay back all your other debts – or most of them. Remortgaging your home to consolidate debts is more common, but it’s still possible with a home equity loan. You simply use the money to pay off any other lenders you have.  It may not be possible with a HELOC because you need the capital upfront. 

  1. Help family

There’s a trend of older family members accessing their home equity to help younger family members access better mortgages with a bigger deposit. They release equity and then give the money to family so they can get on the property ladder when it may have not been possible without their help. 

Home equity loan eligibility criteria

To qualify for a home equity loan, you will need to be at least 18 years old with available equity (sometimes a minimum of over £10,000 equity) and be a UK resident. 

But just because you meet the eligibility criteria with available home equity doesn’t mean you’ll automatically be accepted for the loan. Lenders will need to assess your ability to repay by looking at your credit report and credit score. They’ll also assess your income against the amount you want to borrow over what repayment period, and analyse your debt to income ratio. 

A poor credit rating could stop you from getting a home equity loan. 

What is a good credit score for a home equity loan?

There is no 100% fixed credit score that you need to get a home equity loan with all lenders. Some experts predict that you’ll need at least a 620 to be approved by most lenders. Some other lenders may require a slightly higher score, such as 640-680. For best chances, you might want to try and boost your score up to above 740 before applying. Having a higher credit score may enable you to get offered a lower interest rate. 

How to check your credit score 

You can check your current credit score through a credit reference agency website, such as Experian. Some agencies provide free trials, but remember to cancel or you will be charged. If you spot a mistake on your credit report causing you to have a lower credit score than you should, you can ask for it to be removed. Thus, improving your chances of getting a home equity loan. 

Can I take money out of my house with bad credit?

With bad credit, you are more likely to be denied a home equity loan or HELOC, but it’s not impossible to be approved. If you are approved for an equity loan with bad credit, the loan interest rate may be higher than if you had good credit. This is simply because the lender sees you as a bigger risk and more likely to default on payments. 

Home equity loans with bad credit

If you search for a home equity loan with bad credit online, you will find some lenders that are advertising these specific types of loans. Always shop around for an equity loan with bad credit because the rates may differ significantly. People with an unsatisfactory debt to income ratio may also have these problems. 

Can I get a home equity loan without a job?

It will be almost impossible to get a home equity loan if you are unemployed. The lender must be reassured that you have enough income to make monthly payments. Without an income, they are not likely to give you any credit, regardless of how much equity you have accumulated. 

The only time this is not the case is if you have income from other sources, such as a pension and investments. 

What is the downside of a home equity loan?

The downside of a home equity loan and HELOC is that you can lose your property if you do not keep up with monthly payments. A further downside is the closing costs that are included in the loan agreement. These are fees you must pay at the end of the loan and can total between 2-5% of your total borrowing. 

For example, if you had a loan worth £20,000, you could owe a further £400 to £1,000, wiping out some savings on the low interest. This should be weighed into your decision when applicable. 

Alternative credit options

If bad credit or any other reason is preventing you from getting an equity loan, you may also want to consider:

  1. A personal loan
  2. A credit card
  3. Cash out refinance 
  4. Remortgaging

Free home equity loan guidance!

You can find more home equity loan guidance and FAQ answers right here on MoneyNerd. All our articles and guides are completely free, helping homeowners make smart choices and avoiding the pitfalls of equity release. 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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