How to Tap Home Equity with Bad Credit 

Key takeaways: 

• While it can be challenging to tap home equity with bad credit, options do exist. 
• A no-loan home equity agreement can be a good option for homeowners with bad credit, as credit scores as low as in the 500s can qualify. 

With the rapid run-up in housing prices over the last several years, many homeowners have accumulated considerable equity in their homes. Tapping that equity could provide money needed to pay off high-interest credit card debt, address  maintenance or repairs on your house, make home improvements, build an emergency fund and more.

But if your credit is suffering, you may face more of a challenge in accessing your equity. While there’s no question that it is harder to tap home equity with bad credit, it’s not impossible. Here, we’ll look at six possible options. 

1. Know where you stand. Some people may think they have bad credit but haven’t checked their credit reports or scores to know exactly where they stand. First, understand that credit reports are not the same as credit scores, The reports are very important, though, because the data in them is used to calculate your actual credit scores. You can obtain your reports from the three main credit reporting agencies as often as once a week at www.annualcreditreport.com. If you find any mistakes after reviewing them, follow the directions on each agency’s website to correct them. 
   
   To see your actual scores, check with your bank, credit union and/or credit card issuers. Many make scores from one of the agencies available at no charge to customers. You can also purchase your FICO score for a nominal charge at www.myfico.com. (FICO is an agency that calculates credit scores from the data in the main credit agencies’ reports).  
2. Consider a co-borrower or co-signer for a home equity loan (HEL) or home equity line of credit (HELOC). With these loan options, each lender will have different criteria when it comes to credit, but often, they look for scores of at least 620-680. Some may lend to a borrower with a lower score at a higher interest rate. But if you still don’t qualify, or the rate is too high, a co-borrower or co-signer with very good credit could help.
    
   A co-borrower’s name appears on a loan, so thereby shares ownership of and responsibility for the loan. A co-borrower also has access to the funds. In contrast, a co-signer backs a loan and agrees to make payments only if the primary borrower misses one.
    
   Keep in mind that both a HEL and a HELOC come with monthly debt payments that you are obligated to make. HELs carry fixed interest rates. Most HELOCs are variable-rate, meaning the interest rate – and your payment amount – could change as often as every month. 
3. Reverse mortgage. If you are 62 or older, and have considerable equity in your home, you might consider a reverse mortgage. Instead of making a monthly payment to a mortgage lender, the lender would pay you a monthly amount. In doing so, the lender receives an increasing share of your home’s equity.  
   
   There are no income or credit score requirements for a reverse mortgage, but lenders will review your credit reports and history to assess creditworthiness. Homeowners do need to pay closing costs, which are often higher than those of traditional mortgages, along with origination fees, loan servicing fees, monthly mortgage insurance premiums and an upfront mortgage insurance premium. They’re also required to complete a federally-approved counseling session (for a nominal fee).
    
   Reverse mortgage terms can be complex. Understanding them – including the conditions under which they end – is critical if you are thinking about this option. 
4. Cash-out refinance through an FHA or VA program. In a cash-out refinance, you replace your current mortgage with an entirely new one. If the new mortgage amount is more than what you owe on your current mortgage, you can take the difference in cash.
     
   The FHA cash-out refinance program is available to qualified borrowers with any type of mortgage (not just an FHA one). Its guidelines stipulate a minimum credit score of at least 580, although every FHA-insured lender sets its own criteria, and most do require a score of 600-620.
     
   A VA cash-out refinancing is available to qualified veterans. Most VA lenders will require at least a 620-credit score, but some may consider lower scores. The VA program offers several advantages, such as allowing eligible borrowers to access 100% of their home equity. Also, VA loans do not require mortgage insurance. On the flip side, most borrowers must pay a funding fee, based on the amount of their down payment and calculated as a percentage of the loan amount.
    
   You’ll also need to consider the difference between your current mortgage rate and what you could get on a new one. Unless you purchased your home very recently, mortgage rates are still much higher than the rates many, many homeowners secured a few years ago. If that’s the case, cash-out refinancing likely does not present the best option. 
5. Sale-leaseback agreement. In this type of agreement, you sell your home to a third party – such as an investor – and then lease it back at the rent the buyer sets. This lets you cash out the value of equity you’ve built in the home. Sale-leaseback agreements generally do not take the seller’s credit into account.
    
   Drawbacks include being subject to rent at market rates, and with some agreements, you may still have to pay for property taxes, home insurance, maintenance and other costs that the owner usually covers. While these agreements may offer a solution when the need for cash is critical, and there are no other options, it’s often not the most advantageous alternative for a homeowner. 
6. Home equity agreement (HEA). An HEA, also known as a home equity sharing agreement or home equity investment, may be your best bet if you are trying tap your home equity and have bad credit. Since it is not a loan, qualification requirements are more flexible than those of the other options we’ve discussed. There’s no income requirement, and credit scores as low as 500 may qualify.
    
   With an HEA, you’ll receive cash up front in exchange for a portion of the future value of their home. You’ll have no additional monthly debt payments during the HEA term (with Unlock, that’s 10 years). Your HEA ends when you buy back your equity, which often happens when you sell your home. Unlock’s HEA also allows homeowners to buy back their equity in partial payments throughout the term of the agreement. 
   

Good credit goes a long way in your ability to access your home equity. But even if your credit has hit a snag, options are available. The HEA offers an option for many homeowners in this situation who need cash. Learn more about how Unlock’s HEA works.