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How to Secure a Home Equity Loan with Bad Credit: A 2025 Guide

Julian CruzWednesday, Apr 23, 2025 8:42 pm ET

2min read

Navigating the process of securing a home equity loan with less-than-perfect credit can feel daunting, but it’s far from impossible. In 2025, several lenders have tailored programs to accommodate borrowers with credit scores as low as 620, though terms and conditions vary widely. Here’s how to evaluate your options and maximize your chances of approval.

Understanding the Challenges

A home equity loan requires collateral—your home—and lenders prioritize risk mitigation. Borrowers with “bad credit” (scores below 680) face stricter requirements, including higher interest rates, lower loan-to-value (LTV) ratios, and fees. Key criteria include:
- Credit Score: Most lenders require a minimum of 620–640.
- Equity: At least 15–20% equity in your home (e.g., a $400,000 home with a $300,000 mortgage).
- Debt-to-Income (DTI) Ratio: Typically capped at 43% or lower.

Even with these hurdles, strategic planning can lead to favorable terms.

Top Lenders for Borrowers with Bad Credit

1. Fifth Third Bank: A Traditional Option with Flexibility

Minimum Credit Score: 640
Key Advantage: No closing costs and competitive rates for those with strong equity.
Limitation: The lowest rates require a 750+ score, and in-person applications are mandatory.

2. Figure: Fast Approvals for Renovation Needs

Minimum Credit Score: 640 (higher for second homes).
Unique Feature: Uses an automated valuation model (AVM) for quick decisions, with funds available in 5 days.
Drawbacks: High origination fees (4.99%) and APRs up to 16%.

3. RenoFi: Stretching Equity Limits

Minimum Credit Score: 620
Standout Terms: Allows borrowing up to 125% of current home value for renovations.
Catch: Requires online applications and charges fees/closing costs.

4. Rate: A Digital-First Approach

Minimum Credit Score: 620
Strength: Five-minute online applications and no annual fees.
Weakness: Short draw periods (2–5 years) and no fixed-rate loans.

5. Lower: High CLTV Flexibility

Minimum Credit Score: 640
Benefit: Offers up to 95% CLTV, ideal for borrowers with minimal equity.
Tradeoff: Application fees ($495) and limited nationwide availability.

Strategies to Boost Approval Odds

Improve Your DTI: Pay down existing debt and avoid new loans before applying.
Appeal with a Letter: Explain credit blemishes (e.g., temporary unemployment) to lenders.
Leverage Existing Relationships: Banks offering your primary mortgage may extend more flexibility.
Consider a Co-Signer: A creditworthy co-signer can strengthen your application.

Alternatives to Traditional Loans

If a home equity loan isn’t feasible, explore:
- HELOCs: Adjustable-rate lines of credit with lower CLTV requirements.
- Cash-Out Refinance: Requires at least 20% equity but may offer lower rates.
- Shared Equity Agreements: No monthly payments but involve selling a stake in your home.

Conclusion: Weighing the Tradeoffs

In 2025, borrowers with bad credit have viable options, but terms come with trade-offs. For instance, while RenoFi permits borrowing up to 125% of current home value, its fees and lack of in-person support may deter some. Meanwhile, Fifth Third Bank’s no-closing-cost policy is attractive, but its rate tiers penalize lower credit scores.

Data from Bankrate’s 2025 analysis underscores that 62% of lenders now offer CLTV ratios above 80%, reflecting a broader industry shift to accommodate credit-challenged borrowers. However, the average APR for sub-680 credit borrowers remains 12.5%, nearly double the 6.3% rate for those with excellent credit.

To optimize your outcome:
- Prioritize lenders with flexible CLTV ratios (e.g., Lower’s 95% or RenoFi’s 125% post-renovation).
- Compare origination fees and APRs across platforms like Bankrate and NerdWallet.
- Opt for a HELOC over a fixed-rate loan if you need flexibility, given shorter draw periods and lower upfront costs.

With careful research and strategic planning, even borrowers with bad credit can secure a home equity loan—proving that equity, not just credit, is the ultimate asset.

Data Note: All lender terms and rates are accurate as of 2025. Always confirm details directly with lenders before applying.

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