How Your Bad Credit Affects a Home Equity Loan Application

Trying to get a bad credit home equity loan can be challenging. Your bad credit can affect your home equity loan application in a number of ways. Here are a few things to consider about how your credit can affect your application. 

Increased Scrutiny

One way that your bad credit could affect your home equity loan application is that it will increase the scrutiny in reviewing it. During the process of evaluating your application, they are going to be very strict. They will look over everything on your credit report and they will ask you to document any payment issues.

In addition to items on your credit report, they will be very particular about the other aspects of your application. For example, they may require a higher amount of income for you to qualify for the loan. They will verify your employment and make sure that everything seems to be in order. They will also pay special attention to the debt-to-income ratio that you have. They may want to see a lower debt amount than they normally would because of the bad credit. 


If your application does not meet the normal credit guidelines for one of their home equity loans, they may want to transfer it to another department. For example, many lenders have a subprime lending program for customers that do not fit into the normal credit guidelines. Subprime lending deals with those that have bad credit scores. They work with the riskiest category of borrowers regularly. Therefore, you might go through the process of getting approved one time and then they decide to transfer you to another division to see if you get approved as well. This can end up taking more time than you expected. Therefore, you need to be prepared to spend a little extra time with the application if this occurs. 

Raise Potential Interest Rates

Many times, people apply with a certain lender because of the interest rate that they are quoted. They toss around promotional rates in an effort to get people in the door. Once they look at your credit and determine that it is not good, the interest rate that you are quoted will go up significantly. The interest rate in the promotional materials will typically be for those with the best credit ratings. If you do not fit that category, your interest rate will be quite a bit higher. 

They have to charge a higher interest rate because of the increased risk of default. They want to be accommodated for the increased risk that they take on. 


If your credit has a significant amount of recent lates, there is a chance that they will not be able to approve it at all. It may be declined because it is deemed to risky to lend you the money. If your credit score is too low, they can not justify any reason to give you the loan. While this may be discouraging, you should not give up after one rejection. Try multiple lenders because they all have different lending criteria.