A home equity loan is a type of consumer debt that allows you to borrow against the equity you’ve built in your home. In this context, equity refers to the current market value of your home minus the amount due on your mortgage.
If your application for a home equity loan is approved, you’ll receive the loan amount as a lump sum. These loans usually have a fixed interest rate and a shorter repayment term than a first mortgage.
Since these loans use the equity in your home as collateral, the lender could potentially foreclose on your home if you’re unable to repay the loan (including interest).
Usually, you’d need a good credit score to be approved for a home equity loan from a traditional lender. However, there are some ways to access a home equity loan with a 500 credit score if you know which lenders and loan programs to pursue.
What a 500 Credit Score Means
The Fair Isaac Corporation (FICO) developed a system for ranking individuals by their creditworthiness in 1989. This ranking system assigned each individual a FICO score ranging from 300 to 850. The higher the score, the greater the creditworthiness of the individual.
Today, FICO scores are used by over 90% of top lenders in the U.S. for all types of lending decisions. FICO makes use of your credit reports from all three of the major credit reporting bureaus (Experian, TransUnion, and Equifax) to calculate your score. Essentially, it is used by lenders to predict how likely you are to repay a loan.
Overview of Credit Score Range
FICO scores consist of a three-digit number, which is typically arrived at based on the information on your credit reports. Your score could range from 300 to 850, with the latter representing a perfect credit score.
Most people fall somewhere in between those extremes, so let’s take a look at the different tiers of FICO scores and what they could mean for your chances of getting approved for a home equity loan.
Below 580: Poor Credit
A credit score between 300 and 579 would fall well below the average score of U.S. consumers and could be the result of a recent bankruptcy or multiple defaults on a variety of credit products.
Either way, if your FICO score falls within this range, almost all lenders would consider you a risky borrower. So, you’ll struggle to get approved for new loans and will probably have to pay high interest rates, even if your loan application is approved.
580 to 669: Fair Credit
A credit score between 580 and 669 would still put you below the average score of most U.S. consumers, although most lenders will consider your loan application as long as you’re willing to pay a slightly higher interest rate.
A credit score in this range indicates that there were no major delinquencies in your credit history, although there may have been a few missed payments, high credit utilization, etc.
This score might limit your options when looking for potential lenders, and if you want a home equity loan with competitive interest rates, you might want to wait until you’ve managed to improve your credit score.
670 to 739: Good Credit
If your credit score falls within this range, then you’re more or less on par with the average U.S. consumer. For example, in 2022, the average FICO score in the country was 714. So, most lenders consider this to be a good score, indicating that you’re a reasonably dependable borrower.
As a borrower in this range, you’ll be able to command competitive interest rates, although not as low as someone with very good or exceptional credit. However, it may also be harder for you to qualify for unsecured loans with a favorable interest rate, so you might need to shop around to find a lender willing to offer you a suitable rate.
740 to 799: Very Good Credit
If your credit score is between 740 and 799, this will demonstrate to lenders that you’re a financially responsible, dependable borrower with good credit management skills. A credit score in this range would put you above the average U.S. consumer.
Hence, you’ll be able to qualify for both secured and unsecured loans at competitive interest rates. In addition, most conventional lenders will be happy to approve your application for a home equity loan, as your credit score would demonstrate that your loan payments are almost always made on time.
800 to 850: Exceptional Credit
Borrowers in this range have demonstrated a long history of responsible credit management and, therefore, are more likely to qualify for loans with the lowest interest rates. A credit score of 800 and above would put you in the highest tier of U.S. borrowers, indicating that there’s very little risk of you defaulting on an agreement.
You’d have to have a long history of low credit utilization, on-time payments, and responsible financial management to achieve a credit score in this range. However, with this score, you’ll easily qualify for secured and unsecured loans from conventional lenders at very low interest rates and favorable loan terms.
Factors that Affect Your Credit Score
There are five major factors that have an impact on your credit score. So, if you want to improve your score, it’s vital for you to know what they are.
Payment History
Accounting for 35% of your credit score, this is the most important factor that you should be paying attention to. It tells lenders whether or not you have a track record of repaying the funds loaned to you in a timely manner. It also reveals whether or not you have any recent charge-offs, debt settlements, foreclosures, or wage garnishments in your reports, allowing potential lenders to predict how likely you are to repay any future loans.
Credit Mix
This is the smallest component of your credit score, accounting for about 10% of the final outcome. It informs lenders about the various types of loans you’ve taken out over the years, including installment loans, mortgages, retail accounts, and credit cards.
If you have a variety of well-managed credit accounts on your reports – including installment loans with fixed monthly payments and revolving credit with variable payments – it shows lenders that you can effectively manage different types of financial obligations without getting overwhelmed.
Amounts Owed
Accounting for up to 30% of your credit score, this is basically a way for lenders to measure how much debt you’re carrying relative to the total amount you can borrow. This is also known as the credit utilization ratio.
You can calculate the credit utilization ratio of a particular credit card by dividing the balance you’re carrying by the credit limit on that card. This will tell you what percentage of the available credit you’re using. You should try and keep your credit utilization ratio well below 30% in order to improve your credit score.
Length of Credit History
The length of time you’ve been using credit makes up about 15% of your credit score. This includes the age of your oldest credit account and the average age of all your accounts. A long credit history will help improve your credit score since it allows potential lenders to see that you’ve been managing credit and making timely payments consistently over a number of years. This is one reason to keep your oldest credit card account open and active, even if you don’t make much use of it anymore.
New Credit
The final 10% of your credit score is determined by the number of new credit accounts you’ve opened (or applied for) recently. Typically, lenders will make a hard inquiry to check your credit information each time you apply for a new loan, mortgage, or credit card. Unfortunately, every hard inquiry causes a small decline in your credit score, albeit temporarily.
Too many hard inquiries within a short period of time may indicate to a lender that you’re planning to take on lots of new debt, potentially due to cash flow problems. This will, in turn, make them less likely to approve your loan application.
Implications of a 500 Credit Score
A FICO score of 500 would imply that you perform poorly on all (or most) of the above-mentioned indicators of creditworthiness. In other words:
- You don’t have a consistent record of on-time payments
- You may have a credit utilization ratio of well over 30%
- You may recently have applied for lots of new credit
- You don’t have a well-diversified mix of different types of credit
While all of these statements may not apply to you, a credit score of 500 implies that your performance in a few of these areas has been below average. Such a credit score may also result from a recent bankruptcy or foreclosure.
Whatever the cause might be, it indicates to lenders that you’re a high credit risk and may default on your loans. As a result, many conventional lenders may be reluctant to approve your loan application. And you’ll almost certainly have to pay a high interest rate on any new loans you take out.
What is a Home Equity Loan?
As discussed earlier in this article, a home equity loan is a type of consumer debt that allows homeowners to borrow a certain amount of money against the equity they’ve built in their homes. Typically, the loan amount depends on the current market value of the home being used as collateral minus the balance still due on the original mortgage. To get approved for such a loan, you may need to pay a variety of fees and upfront costs, such as an appraisal fee, stamp duties, title fee, and closing fees.
Lender Requirements for Home Equity Loans
The exact requirements to qualify for a home equity loan will vary from one lender to another. Typically, conventional lenders require a higher credit score (around 620) and a low debt-to-income ratio before approving a loan application. Some other common requirements might include the following:
- Your equity in the home should exceed at least 20% of its current market value.
- You (the borrower) should have a steady, verifiable income or employment history for the last two years before applying for the home equity loan.
- A low debt-to-income ratio is calculated by taking the sum of all your monthly debt payments and dividing it by your gross monthly income.
The requirements might differ slightly with government-insured home equity loans, such as an FHA Cash-Out Refinance or an FHA 203(k) Rehabilitation Loan. While these are not specifically labeled as home equity loans, they do allow individuals to borrow funds against the equity they’ve built in their homes.
You may also be able to qualify for other such home equity loans (and equivalents) insured by the VA, USDA, or other government bodies. In general, these government-insured loans have lower credit score requirements than conventional loans offered by private lenders.
The Importance of Your Credit Score for Loan Approvals
Your credit score is one of the most important factors that potential lenders will take into account when evaluating your loan application. However, there are also some factors other than the credit score that might affect your chances of qualifying for a home equity loan. These are:
- The amount of equity you have in your home
- Your employment history and the stability of your income source
- The percentage of your income that goes towards paying off existing debt
- The loan-to-value ratio, which should be below 80%
- The purpose of the loan is to improve the home, consolidate debt, etc.
Overall, you may qualify for a home equity loan with a low credit score if all the other factors are in your favor. So, if you have a significant amount of equity in your home, a debt-to-income ratio of 40% or less, and a steady source of income – then you will find it easier to qualify for a loan despite your poor credit.
Can You Get a Home Equity Loan with 500 Credit Score?
Getting a home equity loan with a 500 credit score will not be easy, as most conventional lenders will require a credit score of 620 or above to even consider your loan application. There are, however, a few ways you can increase your chances of qualifying for a home equity loan with bad credit. Some of these are as follows:
Get a Co-Signer
If you’re finding it hard to qualify for a home equity loan with a 500 credit score, you could consider getting a co-signer. The co-signer could be a parent, a spouse, a sibling, or any other person who, on paper, would be just as responsible for repaying the loan as you are. Hence, if you don’t make payments on time, their credit will suffer along with yours.
Having a co-signer will strengthen your application and improve your chances of being approved for the home equity loan. Lenders will have more confidence that the co-signer will repay the loan even if the primary borrower falls behind on payments.
Choose the Right Lender
Choosing the right lender is a must when you’re trying to qualify for a home equity loan with bad credit. To start, you should try and apply for a loan from a lender you already have a relationship with, such as your bank or your mortgage lender. Since you’re already their customer, they’re more likely to want to work with you despite your bad credit score.
Secondly, you might want to choose a lender that offers FHA-insured loans, such as an FHA Cash-Out Refinance, since these typically have less stringent credit score requirements. Finally, if applicable, you may also try to find a lender that offers VA- or USDA-backed loans against the equity in your home.
Getting a home equity loan with a low credit score of 500 points can be challenging but possible. However, if you want an alternative, a cash-out refinance might be right for you. Going with an established and reputable lender like Mutual of Omaha Mortgage will further boost your chances. They offer cash-out refinance options for individuals with a FICO score of 680 and below. With a cash-out refinance, you can access the home equity you’ve built in your home to pay off debt, make a major purchase, or use the funds for just about any purpose.
If you have a 500 credit score and are looking for alternative mortgage solutions to home equity loans, answer a few questions online to contact a mortgage expert from Mutual of Omaha Mortgage and review your options with them.
Dispute Errors on Your Credit Reports
If your low credit score is due partly to some erroneous information on your credit reports, then you should dispute the errors before applying for a home equity loan, as this may improve your credit score and, consequently, your chances of getting approved for the loan.
To start with, you need to obtain a free copy of your credit report from each of the three credit reporting bureaus. Then, you should scrutinize each report carefully, identifying any inaccuracies that may be negatively affecting your credit score and disputing them.
Successfully resolving these disputes will improve your credit and make you a more attractive applicant to lenders offering home equity loans.
Your Options for Home Equity Loans with 500 Credit Score
While most conventional lenders might be hesitant to extend a loan to an applicant with a FICO score of 500, there are some lenders out there willing to offer home equity loans to borrowers with bad credit. In order to work with these lenders, however, you’ll need to have:
- A relatively high income with a steady employment history
- A significant amount of equity in your home
- The willingness to pay a higher interest rate
This is intended to offset the additional risk that the lender will be taking by offering a loan to someone with a poor credit score. Lenders offering home equity loans insured by various government agencies – such as the Federal Housing Administration or the United States Department of Agriculture – might be a good option for those with a 500 credit score.
Tips on How to Increase Your Chances of Approval
As mentioned above, there are some ways you can increase your chances of qualifying for a home equity loan, even with a poor credit score. These include:
- Improve your debt-to-income ratio by paying off some existing debts
- Find a co-signer with an above-average credit score
- Choose a lender you’ve worked with before, such as your bank or mortgage lender
- Demonstrate a high-income and stable employment history
- Shop around and compare repayment terms and interest rates from multiple lenders
- Choose a lender that specializes in working with borrowers with bad credit
You can use these tips to improve your chances of qualifying for a home equity loan with a 500 credit score. Alternatively, you can work on building up your credit score before applying for the loan in order to get the benefit of lower interest rates and better repayment terms.
