If you are a homeowner, you have a great asset at your disposal – your home equity. But while you may have easily qualified for the original mortgage, you will have to prove your creditworthiness again if you want to get a home loan. This means that your credit score is one of the deciding factors between approval and rejection.

Key Findings

  • Home equity loans allow homeowners to borrow cash against equity.
  • Lenders generally want to have a credit score of at least 700.
  • Interest rates are better for borrowers who have a higher credit score.

What is a home loan?

As the name suggests, a home equity loan is a loan secured by the capital you have accumulated in your home. With every mortgage payment you make, you increase equity, which is the difference between the amount you owe and the value of the home. If your house goes up in value, it also increases your capital. Home equity loans are often referred to as second mortgages.

When you apply for a home equity loan, the lender will evaluate your creditworthiness based on several factors, including:

  • Employment history
  • Income
  • Credit rating

What is a credit score?

While each of these factors is important, your credit score is perhaps the easiest one for lenders to assess. Most lenders use your FICO score and get your credit report from at least one of the three major reporting agencies, Equifax, Experian, or TransUnion.

Your credit score is calculated based on five things:

  1. Your payment history: 35%
  2. Amount you owe on all bills: 30%
  3. Length of your credit history: 15%
  4. Credit bundle such as retail bills, auto loans, mortgages and credit cards: 10%
  5. New credit: 10%

Lenders assume that if your credit score is high enough, you have a track record of paying on time and being responsible for your money.


If your credit score is below what you want, you can fix it yourself. Some companies offer to “repair” your credit history for a fee, but they don’t do anything you couldn’t do – call creditors, remove incorrect information from your credit reports, etc. Save money and think about how to improve your credit history. loan on your own.

What credit score do you need?

Credit scores are usually divided into five levels:

  • 300-579: Bad
  • 580-669: fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

Most lenders look for a credit score in at least the Good range to approve a home secured loan, with a target of 700. However, the higher your credit score, the lower the interest rate you can qualify for. So diligence in your financial life can pay dividends when you are interested in borrowing.

If your credit score is below 700, all is not lost. Some lenders will take a closer look at your creditworthiness by looking at other factors such as your debt-to-income ratio. If your score is very low, there are steps you can take to try to improve it before applying for a home equity loan.

How to improve your credit score

The first step to improving your credit score is to review your credit reports to determine what is causing it. You can access your credit reports from each of the three credit agencies for free once a year through the official website. If you find fraudulent bills or debts that have been paid but not paid off, contact the agency to investigate.

Because so much of your credit score is based on your payment history, paying your credit cards, auto loan, or first mortgage on time can help raise it. If you’re behind on bills, catch up. Having all of your checking accounts in good standing shows creditors that you are paying your bills on time and consistently.

Another way to grow your account is to pay off accounts with high balances. You decrease your credit utilization rate by paying them down, which shows that you have more credit and your credit cards are not depleted, for example. Another way to reduce your credit usage is to request an increase in your line of credit – the more space you put between your debt and your credit limit, the better. The ideal use of credit is below 30%.

How long does it take to fix your credit score?

There is no quick fix for bad credit, but once you start taking steps to improve your score, it can happen within a few months. Bad marks on your credit report, such as collections, late payments, or bankruptcies, remain on your report for seven to ten years.

Does bad credit automatically disqualify you from a home equity loan?

Not necessary. While a score in the Poor range will probably disqualify you, some lenders will consider other factors in addition to your credit score if it falls in the lower end of the Good or Fair scale. However, if you get approved, you probably won’t have the same attractive interest rate as you would with a higher score.

If you are eligible for your first mortgage, will you be eligible for a home equity loan?

Home equity lenders will make their decisions based on your current creditworthiness. So if you’ve continued to maintain a solid credit history since you took out your original mortgage, you might be fine. However, if you’ve had a better track record since then, you may run into difficulties.

bottom line

Good credit opens many doors, especially in the world of lending. If you are interested in using your home equity for a cash loan, you will need good credit. If you want a higher interest rate on this loan, you will need a great loan. Before you apply for a home equity loan, pull out your credit reports and see where you are.

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