Home Equity

How to Access Your Home Equity With Bad Credit

July 21, 2019

As you make every monthly payment on your mortgage, you can amass a substantial amount of equity over time. Building equity is a big reason why so many people choose to buy a home instead of renting one.

At some point, you may want to borrow some money from your equity to fund other financial projects. Maybe you have high-interest credit card debt to pay off. Or perhaps you’re in a pinch for home remodel financing and want an alternative to getting home improvement loans with bad credit. In either case, you usually need a good credit score.

It may seem unfair that a bad credit score can prevent you from accessing your own equity and getting approved for a home improvement loan or HELOC. After all, it’s your money that you’ve invested into your home. Fortunately, there are ways to work around a poor credit score—you just need to choose the right form of financing.

How to Get Home Equity With Bad Credit

If you’re wondering how to access home equity with bad credit, you’re in the right place.

Here are five ways you can unlock your home equity with poor credit.

1. Home Equity Loans or HELOCs

Even if your credit isn’t great, you may still qualify for a home equity loan or home equity line of credit (HELOC Loan).

Both of these financing options use your home as collateral. As a result, your home equity lender has the right to take your home if you don’t repay them on time. Due to this added security, home equity loans and HELOCs are less risky for lenders. In turn, they often come with more lenient credit score requirements and a lower interest rate than other forms of financing.

Here’s how these two borrowing tools work:

Home equity loans – With a home equity loan or second mortgage, you can borrow a lump sum of money directly from your home equity. Most lenders allow you to borrow up to 80% of your available equity.
HELOCs – With a HELOC, you can borrow money from your equity using a revolving line of credit. Your lender will give you a credit limit, which determines how much you can borrow at any given time. You’ll also receive a variable rate of interest.

Home Equity Loan and HELOC Credit Score Requirements

Most home equity loan and HELOC lenders require you to have a minimum credit score of 620 or above.

If your credit score is below that, it’s still sometimes possible to get loan approval. If you want to have HELOC with bad credit, it may just be a little more challenging. For example, you’ll usually need to meet stricter income, payment history, debt-to-income ratio, and equity requirements.

Your lender may also charge you a higher interest rate and lend you a smaller amount of money to account for your riskier borrower profile.

2. Subprime Cash-Out Refinancing

Another way you can get cash from your home equity is with subprime cash out refinance. As with traditional mortgage refinancing, this process replaces your existing mortgage with a new one. The difference is that your new loan will be for a larger amount.

The extra money you borrow with this loan allows you to extract cash from your equity. You can use this money to pay for a variety of personal expenses.

Just keep in mind that you’ll have to pay closing costs on the entire loan amount, not just the additional portion. All of your mortgage terms will also be reset around your current credit score.

Subprime Cash-Out Refinancing Credit Score Requirements

To qualify for a cash out refinance, you usually will need a minimum credit score of 620 or above, though every lender has different requirements. You may be able to find a lender that’s willing to lend to you despite your low credit score.

Even if you can qualify for a cash-out refinance, it may not be the best financial decision in the long run. That’s because your new mortgage loan term will be based on your bad credit score. In turn, you could get stuck with a:

Higher interest rate
Costlier monthly payments
Expensive closing costs

The less favorable loan term may offset the financial benefit you get from the cash you receive upfront.

3. Reverse Mortgages

With a reverse mortgage, you can receive money from your home equity in a lump sum, a line of credit, or monthly payment.

Unlike the other types of financing we’ve discussed so far, with this loan option, you won’t need to repay any of this money until you sell your home or pass away. Instead, your mortgage balance will simply grow over time.

Most people who use reverse mortgages never plan on moving out of their homes, so their remaining mortgage balance is due at the time of their death. Thus, if you hope to leave your home as an inheritance, a reverse mortgage may not be right for you.

Reverse Mortgage Credit Score Requirements

Reverse mortgages are only available to people of retirement age who have over 50% equity in their homes. If you meet these criteria, you’ll be happy to learn that reverse mortgages don’t have strict credit score requirements.

As long as you have a history of making debt payments on time, your bad credit score won’t prevent you from qualifying for a reverse mortgage.

4. Sell Your Home

A simple way to liquidate all of your equity is to sell your home. Luckily, your credit score won’t have any bearing on your ability to pursue this option.

However, selling your home still comes with some obstacles. For instance, you’ll need to:

Hire a real estate agent
List your home on the market
Wait for a serious buyer to make an adequate offer
Go through the various steps involved in the selling process
Move out of your home

Even if your home sells quickly, renting or buying a new home can be difficult when you have bad credit. If you don’t have a new home lined up already, selling your home may not be a viable option.

Note: You’ll only receive cash from your equity if you sell your home when it’s in a positive equity state (meaning you get more money from the sale than you owe on your mortgage). If your home is currently in a negative equity state, known as being “underwater,” you may only be able to sell your home in a short sale. A short sale won’t provide you with any cash from your equity.

5. Residential Sale-Leaseback Programs

One of the most innovative ways to access your home equity with bad credit is to enroll in a sale-leaseback program. Non QM lenders with this type of program let you sell your home and rent it back, enabling you to convert your equity into usable cash.

Here are a few upsides to this type of program:

You can sell your home confidentially – With a sale-leaseback program, you won’t need to list your home on the market or put up any “For Sale” signs on your lawn. In turn, you can sell your home without alerting your neighbors, friends, or family.
You won’t need to move out of your home – Buying a home is a big deal. Many homeowners treasure the home they’ve purchased and personalized over the years. If you cherish your home but need access to its equity, this type of program is perfect for you. It will allow you to stay in the home you love while accessing the equity you need.
Your credit score won’t impact your eligibility – Sale-leaseback programs are typically asset-based, not credit-based. As long as you have a minimum amount of equity established in your home, you can qualify for this type of program.

The Best Way to Get Home Equity With Bad Credit

Your home equity is a valuable financial resource. It can help you with debt consolidation, finance a home renovation, or fund a big purchase. You just need to use the right tools to access it.

If you have bad credit, one of the easiest ways to get cash from your home equity is to enroll in a sale-leaseback program. Sale-leaseback solutions are fast and flexible. By enrolling in one, you can:

Confidentially sell your home
Stay in your home as a renter for as long as you want
Liquidate your home equity
Enjoy the opportunity to buy back your home at any time

Key Takeaways

If you are looking for ways to access your home equity with bad credit, there are plenty of options for you to explore. Connect with a financial advisor to discuss further what solutions are available to you.

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