Jamie Johnson 
Key takeaways:
- Home equity loans and HELOCs often have minimum credit requirements, but also look at factors like your available equity, income, and mortgage history.
- A Home Equity Agreement (HEA) can help you access the funds you need, even if you have poor credit.
- Raising your credit score, lowering your DTI ratio, or improving your home’s appraised value can improve your eligibility over time.
There are many different ways to access your home equity, even if your credit score isn’t where you want it to be. Whether you’re trying to consolidate high-interest debt or cover a major expense, understanding how different home equity products work can help you choose the best option. Let’s look at some traditional financing options and flexible alternatives to explore.
Can You Get a Home Equity Loan with Bad Credit?
Most lenders consider “bad credit” to be any score below 620. If your score falls below that threshold, it can be more challenging to qualify for a home equity loan, though not impossible. That’s because lenders consider other factors beyond just your credit score.
For instance, most lenders want to see that you have at least 20% in home equity, and a debt-to-income (DTI) ratio below 43%. They’ll also verify your income and employment history and confirm that your existing mortgage is in good standing. Even still, a low credit score can make it harder to get approved for a home equity loan. If you are approved, you may get stuck with higher interest rates or lower loan limits, even if you have substantial equity
Traditional Options: Loans and Lines of Credit
If you’re looking for ways to access your home equity, you may start by exploring traditional financing options like a home equity loan or home equity line of credit (HELOC). Both options let you borrow against your home equity, but tend to come with strict underwriting requirements, which can be tough to meet with below-average credit.
Home Equity Loan
A home equity loan allows you to borrow a lump sum of money, so it’s best for borrowers who know exactly how much they need to borrow. These loans come with fixed interest rates and set repayment terms, so you’ll have predictable monthly payments.
Some lenders will consider borrowers with credit scores as low as 620, while others prefer a score of 680 or higher.2 You’ll also need a loan-to-value (LTV) ratio of 80% or less.
Pros:
- Predictable monthly payments
- Fixed interest rates
- Interest payments may be tax deductible4
Cons:
- Harder for borrowers with poor credit to qualify
- Borrowers with poor credit may have high interest rates
- Adds a second mortgage to your home
Home Equity Line of Credit (HELOC)
A HELOC operates like a credit card that’s secured by your home. Lenders give you access to a revolving line of credit that you can draw from on an as-needed basis during the draw period, which typically lasts 10 years. During the draw period, you’ll only have to make interest payments on any money you borrow. Once the repayment period begins, you’ll repay the entire amount in full.
Pros:
- Flexible access to the funds
- Only pay interest during the draw period
- Good option for unpredictable expenses
Cons:
- Often comes with variable rates
- Risk of over-borrowing
- Puts your home at risk
Flexible Alternatives to Consider
If a home equity loan or HELOC doesn’t work for you because of the credit requirements, there are other options you can explore.
Home Equity Agreement
A Home Equity Agreement (HEA) gives you a flexible way to tap into your home equity without taking on extra monthly payments or additional debt. Instead of borrowing the money, you’ll receive the funds upfront in exchange for a portion of your home’s future value at settlement.
There are no monthly interest payments, and you’ll settle the agreement when you sell, refinance, or reach the end of your term. You’ll also retain full ownership of your home during the entire process.
And HEA providers consider a number of different factors beyond just your credit score, like your home equity and mortgage history. For example, Unlock accepts credit scores as low as 500 as long as you meet the home equity requirements and haven’t had any late mortgage payments in the last two years.
The chart below shows how an HEA compares to traditional options like a HELOC and home equity loan.
| HEA | HEL | HELOC | |
| Credit score requirement | None | 620-680 | 620-680 |
| Debt-to-income ratio requirement | None | 36% – 45% | 36% – 45% |
| Equity requirements | 25% to 30% | 20% | 20% |
| Payoff structure | No monthly payments. Homeowners share a portion of their home’s equity when they sell or when they decide to settle during their term (typically 10 to 30 years). | Monthly payments with interest | Interest-only monthly payments based on the amount borrowed during the draw period (usually 5 to 10 years); After the draw period, monthly payments that include the principal and interest (typically spread out over 20 years). |
Reverse Mortgage
A reverse mortgage allows homeowners aged 62 and older to access their home equity while still living in the home. And borrowers don’t have to make their monthly mortgage payments, so it can be a good way for retirees to free up their expenses. However, interest and fees will continue to accumulate, so the loan balance grows until you pay off or sell the home. Reverse mortgages don’t have the same credit and income requirements as other home equity products.
Government programs and grants
Depending on your location, you may qualify for state or federal grants that help homeowners fund repairs or accessibility improvements. These programs usually come with smaller amounts than other financing options, but they can be a good way to address specific needs.
Tips to Improve Eligibility (If You’re Not Ready Yet)
If you’re looking for ways to access your home equity but aren’t quite ready to apply, there are certain steps you can take to improve your eligibility. For instance, paying down revolving balances, disputing any errors on your credit report, and setting up autopay to avoid missed payments can help rebuild your credit over time.
Lowering your DTI ratio can also boost your eligibility. Lenders want to see that you have enough monthly cash flow to manage your housing costs, so paying down or consolidating high-interest debt can help bring your ratio down. Increasing your home’s appraised value is another useful strategy. Even minor repairs, like fresh paint or updated fixtures, can improve your home’s curb appeal and potentially lift your appraisal. Finally, consider applying with your current mortgage lender. They already have a history with you and may be more willing to work with your unique circumstances.
Why Unlock May Be the Right Fit
If you’re looking for a flexible way to access your home’s equity, an HEA from Unlock is another option to consider. Unlike traditional loans, an HEA allows you to access home equity funds without taking on additional monthly payments or debt. And HEA providers look at more than just your credit score, so homeowners with a wide range of financial backgrounds may qualify.
With an Unlock HEA, you’ll receive a lump sum of cash based on your available equity and maintain full ownership of your home throughout the agreement. Instead of making monthly payments, you’ll settle the agreement when you sell your home, refinance, or reach the end of your term. This structure gives homeowners the ability to move forward without the pressure of an added monthly obligation.
The Bottom Line
Accessing your home equity with bad credit can be challenging, but it is possible. For example, you can take time to strengthen your financial profile or explore alternatives like an HEA. What matters most is choosing an option that supports your long-term financial goals.
If you’re looking for a flexible way to access funds without taking on additional debt or monthly payments, you may want to explore an HEA from Unlock. The application process is simple and designed to give you the information you need to make a well-informed decision about your home’s equity.
FAQ
It’s possible to qualify for a home equity loan with a 600 credit score, but approval can be difficult. And you may face higher interest rates, stricter documentation requirements, or reduced loan amounts. Some homeowners choose to improve their credit first, while others explore alternatives that don’t put as much emphasis on credit.
If you’re not approved for a HELOC, you can consider an HEA, which allows you to access your equity without any monthly payments. You can also take time to strengthen your credit or lower your debt-to-income ratio before applying again.
An HEA can be a safe option for many homeowners, including those with lower credit scores. HEA providers review your overall financial and mortgage history, so your eligibility isn’t based on credit alone. As with any financial decision, it’s important to review the details and make sure the agreement supports your goals.
Accessing your equity through a traditional loan or HELOC may impact your credit because most lenders run a credit check when you apply and will also report your monthly payments to the credit bureaus. In comparison, Unlock’s HEA doesn’t require a hard credit pull and there are no monthly payments to report, so it won’t affect your credit score.
