Depending on which situation applies, lenders cannot issue them a home equity loan until they either earn additional equity in their home or pay off some of their existing debts. Another common issue you might run into is having a credit score or payment history not meeting a lender's requirement.
You can still qualify for a home equity loan if your credit isn't perfect, especially if you meet other criteria like having solid income and a low debt-to-income ratio (DTI). Still, most lenders look for a minimum credit score of at least 680, while more lenient ones may accept a score as low as 620.
A minimum credit score of 620 is usually required to qualify for a home equity loan, although a score of 680 or higher is preferred. However, a lender may approve you for a loan with a lower score if certain requirements are met.
A $50,000 home equity loan comes with payments between $489 and $620 per month now for qualified borrowers. However, there is an emphasis on qualified borrowers. If you don't have a good credit score and clean credit history you won't be offered the best rates and terms.
Here, then, is what a $10,000 home equity loan would cost now that rates have been reduced, tied to two common repayment periods and the rates those periods come with: 10-year home equity loan at 8.50%: $123.99 per month. 15-year home equity loan at 8.42%: $98.01 per month.
On the downside, HELOCs have variable interest rates, so your repayments will increase if rates rise. Another risk: A HELOC uses your home as collateral, so if you don't repay what you borrow, the lender could foreclose on it.
You generally need credit scores of 620 or above to get a home equity loan. But getting approved with higher credit scores can be easier than with lower scores, and having good credit could also lower your interest rate.
Get an FHA Loan to Buy or Refinance a Home. The FHA loan program can help you buy or refinance a house even if you have a bad credit score. FHA home loans are backed by the Federal Housing Administration, which allows lenders like Freedom Mortgage to offer loans to customers who may have lower credit scores.
Typically, lenders require a DTI of 43% or lower. To calculate your DTI, add up your monthly expenses, including your mortgage payment, student loan payments, regular bills, child support, and other debt, and then divide that by your monthly income.
An FHA loan will typically be the easiest mortgage to qualify for because it offers the lowest credit score requirement — far lower than for a conventional loan — and requires only a 3.5% down payment.
The amount you can borrow is based on your income, credit history, the equity you've accumulated, and your home's current value. When you apply for a loan, it usually takes between two weeks and two months to close the loan and get your cash.
FHA loan: 500 credit score
You can qualify for an FHA loan with a low credit score of 500 and a 10% down payment, or 3.5% down if your FICO is 580 or above. FHA loans accept applicants with credit scores as low as 500. Applicants with scores between 500 and 579 need a 10% down payment.
Too Much Debt
Lenders rarely approve loans if debt exceeds 43% of income, including mortgages, car, credit card, and student loans. If a borrower is already carrying a lot of debt, lenders may worry that they will struggle to make payments on the HELOC in addition to their other financial obligations.
Adequate income
A steady income indicates to lenders that you'll be able to make payments on your loan. Plus, the higher your income, the easier it'll be to lower your DTI ratio. Be prepared to provide income verification information when you apply for your loan, such as W-2s and paystubs.
How to qualify for a home equity loan with Discover. Discover requires borrowers to have a FICO credit score of at least 680 to qualify for a home equity loan, as well as a history of responsible credit use and verifiable employment and income.
You can buy a $300,000 house with only $9,000 down when using a conventional mortgage, which is the lowest down payment permitted, unless you qualify for a zero-down-payment VA or USDA loan. Different lenders have different rules, but typically they require a 620 credit score for conventional loan approval.
Most real estate lenders consider anything under 620 as a low credit score. A 550 score is considered poor, signaling potential risk to lenders. However, you still have options like FHA loans, which may help you purchase a home with less-than-perfect credit.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63.
Does a home equity loan require an appraisal? Yes. This is the case for home equity related financial products such as fixed rate home equity loans, home equity lines of credit (HELOCs), and cash out refinances.
Credit score: At least 620
In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a home equity loan with bad credit.
Home Equity Loan Disadvantages
Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.
Key Takeaways
Don't take out a home equity loan to consolidate debt without addressing the behavior that created the debt. Don't use home equity to fund a lifestyle your income doesn't support. Don't take out a home equity loan to pay for college or buy a car. Don't take out a home equity loan to invest.
A home equity loan is a loan that allows you to borrow against your home's value. In simpler terms, it's a second mortgage. When you take out a home equity loan, you're withdrawing equity value from the home. Typically, lenders allow you to borrow 80% of the home's value, less what you owe on the mortgage.