3 Best Providers of Home Equity Loans for Bad Credit

3 Best Providers of Home Equity Loans for Bad Credit
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Brittney Mayer
By: Brittney Mayer
Posted: July 31, 2018
BadCredit.org's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Although being turned down for a loan due to bad credit can be frustrating, it’s important to understand the bank’s perspective, too. After all, you probably wouldn’t lend money to someone with a history of not repaying their debts — why should the bank?

Lenders need to know you can — and will — repay your loan. That’s where collateral can make a big difference. Using a vehicle or property to secure a loan shows you’re serious about repaying it, as well as providing the bank with definitive means of recouping its losses if you default.

Home equity loans and credit lines use the equity you’ve built in your home as collateral to secure financing. Since property is considered strong collateral, home-equity secured loans can be easier to obtain with low credit scores than other, unsecured loans.

Providers | How It Works | Alternatives

Top Providers for Home Equity & Cash-Out Refinance Loans

Although most home equity loans won’t require a down payment, you’ll still likely have to go through a credit check. Given that each lender can set its own approval requirements — and that not all lenders offer home equity loans — finding a lender will likely be the most challenging part of the process.

One of the easiest ways to connect with multiple lenders is to use an online lending network. These networks typically have dozens, if not hundreds, of lender partners, which can improve your chances of finding a compatible lender.

  • Options for: home purchase, refinance, home equity, and reverse mortgage
  • Lenders compete for your business
  • Receive up to 5 offers in minutes, and pick the best offer for you
  • Founded in 1996, LendingTree has facilitated 55 million+ loan requests and $250 billion+ in closed loan transactions
  • Click here for official site, terms, and details.
★★★★★

4.9

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 1996 7 Minutes 9.0/10
  • Options for: refinance only
  • Get 4 free refinance quotes in 30 seconds
  • Network of lenders compete for your loan
  • Trusted by 2 million+ home loan borrowers to date
  • Interest rates are near all-time lows
  • Click here for application, terms, and details.
 
★★★★★

4.7

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies 2004 4 minutes 8.5/10
  • Options for: home purchase, refinance, cash-out, and debt consolidation
  • The nation's largest online lender
  • Allows applicants to buy a home with a minimal down payment (as little as 3.5% down)
  • In some cases, down payment can be a gift from a relative or nonprofit organization
  • Get pre-approved for free – before you shop for your new home – and get more bargaining power
  • Avoid paying Private Mortgage Insurance with PMI Advantage program
  • Click here for application, terms, and details.
★★★★★

4.7

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 2000 6 Minutes 9.0/10

Depending on the online lending network you use, you may be matched with up to five loan offers from the network’s lender partners. That said, you aren’t guaranteed to receive any offers, so the actual number of loans you are presented with may vary based on your qualifications.

Once you’ve chosen a lender from the network, you’ll be redirected to the lender’s individual website. It’s on the lender’s site that you’ll receive the full loan agreement and complete the loan process. Be sure to read through your agreement carefully before accepting it.

How to Obtain Funds from Your Home’s Equity

At a basic level, home equity is described as the difference between the value of your home and how much you owe on it. So, if Pretend Paulie has a home worth $200,000, and she owes $150,000 on her mortgage, then Paulie has $50,000 worth of equity in her home.

There are several ways to obtain cash from your home’s equity, with the best option depending on your needs and situation. These options include both home equity loans and credit lines, as well as cash-out refinance loans.

A traditional home equity loan is a one-time loan that uses your home’s equity as collateral. A home equity line of credit (HELOC) also uses your equity as collateral, but credit lines can be used over and over again.

While home equity loans use your home’s equity as collateral, you’re not limited to housing-related purchases. Home equity loans and HELOCs can be used for any number of things, including home repairs and renovations, as well as non-housing related expenses, like consolidating credit card debt.

Your repayment schedule will depend on whether you have a loan or a credit line, though monthly payments will most likely be required. Home equity loans and HELOCs exist separate from your original mortgage and, thus, are repaid in addition to your current mortgage.

Chart of Potential Home Equity Values

Another way to get cash from your home’s equity is through a cash-out refinance loan. Refinancing your mortgage involves obtaining a new mortgage to pay off your current one, effectively replacing your existing mortgage — ideally, this is done at a lower interest rate than you’re currently being charged.

In a cash-out refinance, you’ll obtain a refinance loan that is larger than the amount you owe on your current mortgage, up to the appraised value of the property. Essentially, you’re obtaining a cash loan at whatever interest rate the new mortgage charges that you’ll repay as a part of your mortgage.

Consider Pretend Paulie, from the earlier example. If Paulie refinances via a cash-out refinance loan, she can choose to get a new mortgage for $200,000, giving her $150,000 to pay off her current mortgage and $50,000 in cash to do with as she likes.

Consumers with low credit scores will likely have the best chance of being approved for a cash-out refinance loan backed by the FHA (Federal Housing Administration). You’ll need a minimum 580 FICO Score and to have made the last 12 monthly payments on your mortgage to qualify.

Personal Loans May Be a Better Alternative

Although home equity loans and credit lines can be a useful way to get cash, you may not need to go to such lengths to obtain financing in a bind, even with poor credit. Depending on your needs, a personal installment loan may do the trick.

Of course, the lower your credit score, the less likely it is you’ll be approved for a large loan. The APR you’re charged will also depend on your creditworthiness. Using an online lending network, like our options below, can help you connect with multiple lenders and compare offers.

   
★★★★★

4.8

Overall Rating

Loan Amount Interest Rate Loan Term Loan Example
$500 to $10,000 5.99% - 35.99% 3 to 72 Months

See representative example

Personal loans can be ideal for situations in which you don’t have enough equity to qualify for a home-equity secured loan or when you don’t wish to refinance your existing mortgage. It may also be better for smaller loans (less than $5,000) as the origination fee charged for personal loans can be less than the fees charged for home equity or refinance loans.

Additionally, personal loans can be the smarter option if you’re at all worried about repaying your loan. If you fail to repay a loan for which your home is collateral, you could risk losing your home. Only obtain home-equity secured loans if you are positive you can repay your loan as agreed.

There Are No Guarantees in Lending

Obtaining a loan with a low credit score can be tough. Bad credit is a sign of mismanaged debt, which makes lenders hesitate to approve new loans. Think of it this way: Would you trust your possessions to someone who constantly loses their own?

In the end, lenders don’t want to give money to someone who might not give it back. And if your credit history shows you’ve had trouble repaying debt in the past, you’ll need to offer lenders more than just your word; you’ll often need to provide some sort of collateral.

For consumers with low scores and few financing options, home equity loans, HELOCs, and cash-out refinance loans can be options for making use of carefully built home equity to secure a loan. But they’re not without risk.

The reason lenders accept property as collateral is that they know they can typically sell the property to recover their lost funds should the borrower default on the loan. While this is great for the lender, it means you’ll lose your home if you don’t repay your loan.