How to Get a Home Equity Loan with Bad Credit

A home equity loan is a type of loan that you can get using your home's equity as collateral. Lenders prefer home equity loans to unsecured lines of credit, as they allow the lender a way to get their money back should the borrower default on the loan. A home equity loan can be very useful if you're thinking of remodeling your home or consolidating high interest credit cards. You can get a home equity loan even if you have bad credit. There are pitfalls to getting a home equity loan. However, if you're careful, you can avoid them.


Step 1

Determine how much equity you have in your home. You can base your home's equity either on the sales price or on the appraisal value. Refer to the documents for your mortgage closing. Also look at your latest mortgage statement. Deduct the current mortgage loan balance from the value of your home to determine your home's equity.


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Step 2

Create a budget. Find the total amount of your net income and calculate your total monthly expenses. You can usually find these amounts in your checking account ledger. Get your average monthly expenses by adding your total expenses for the last year and dividing them by 12. Determine how much take-home pay you have over and above your regular expenses.


Step 3

Figure out how much you can afford to borrow. The best way to do this is with a home equity amortization calculator such as the one at You can also use a book containing amortization values. Determine a potential home equity loan amount, interest rate and term in months. Keep in mind that home equity loan interest rates tend to run between 8 and 15%, and tend to be higher for people with bad credit. Also, you can usually only borrow 80% of your home's equity. Then check the monthly payments that will be required to pay off the home equity loan, either in the online calculator or in the book's tables.


Step 4

Shop around to find the lowest possible rate on a home equity loan. Look for information on a loan comparison shopping site such When you are filling out the forms, be honest about your bad credit history. This will increase the accuracy of the home equity loan offers you receive and help you to avoid having any unpleasant surprises later on.



Step 5

Check a website such as if you are declined for a home equity loan by major mortgage lenders. This site specifies that they provide home equity loans for people will bad credit. If you don't recognize the name of any lender, carefully check its reputation on the Better Business Bureau website. If you can't find a lender on the BBB website or if it has a bad rating, don't get a home equity loan from that lender.


Step 6

Avoid doing business with home equity loan lenders that send you unsolicited offers. Also be wary of offers that seem too good to be true. Remember that you will have to pay closing costs on your home equity loan. They will probably include points, which usually cost 1% of the total loan amount. Don't assume that you should pay more simply because you have bad credit. If the points are higher than 1%, ask the lender why.


Visit the website to find your current credit score. You can also download a free copy of your credit report from this site each year from each of the major credit reporting agencies. Don't confuse a home equity loan with a home equity line of credit, which is a form of revolving credit which uses your home as collateral. Since you have bad credit, chances are you're inclined to overestimate how much you can afford. To be on the safe side, borrow a smaller amount when you get your home equity loan. Also, remember that you can't afford to make any more mistakes when you have bad credit. Make sure you pay every payment on your loan on time, or you may risk losing your home.

Things You'll Need

  • Mortgage statement

  • Home purchase or appraisal records

  • Checking account ledger

  • Home equity loan amortization tables or calculator



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