Do home equity loans require a credit check?

While different lenders may assess home equity loan applications differently, a credit check may be one of the steps involved. If you’re concerned about your credit score affecting your application, it may be worth learning more about exactly what’s required to help improve your application’s chance of approval.

How do home equity loans work? 

The equity in your home is the current value of your property minus the remaining mortgage principal. This equity can be used as security or collateral when borrowing money.

You may be able to access your usable equity by refinancing your mortgage and “topping up” your home loan, or by applying for a separate home equity loan to be repaid plus interest in instalments over time, similarly to a personal loan.

You could also choose a line of credit, which lets you borrow up to a credit limit, only pay interest on what you’ve borrowed, and make repayments when you choose, similarly to a credit card.

Retirees who own their own homes may also be able to access the equity in their property through a reverse mortgage.

Does your credit score affect a home equity loan? 

Before a lender will approve a home equity loan application, it will want to be confident that you can comfortably take on the extra debt with minimal risk of finding yourself in financial stress. A lender may look at a wide range of factors when making this decision, such as your level of equity, your household expenses, your debt to income ratio, and yes, your credit history.

The type of home equity loan you’re applying for and your financial situation may affect if a credit check is required as part of your application. For example, refinancing your home loan means effectively applying for a whole new home loan, and a credit check is often a standard step in this application process.

Consider contacting a potential lender before you apply for a home equity loan to ask if a credit check will be required. 

Can you apply for a home equity loan with bad credit? 

Even if your credit score isn’t the strongest, it may still be possible to access your home equity. Some of the options you could consider include:

• Check your credit score for free: Getting a better idea of a how a lender may perceive you may be helpful when making financial decisions.
• Look at your application: Depending on your financial situation, applying for a smaller home equity loan, lowering your expenses, or increasing your usable equity may be able to help offset a poor credit score.
• Compare alternative lenders: Some specialist lenders may offer flexible home equity loans that may better suit borrowers who may not be able to tick all of the boxes that other lenders would prefer. Be sure to check if these financial products are suitable for your financial situation before applying.
• Contact a mortgage broker: These home loan experts can help you work out if a home equity loan is the best option for your financial situation, compare available home equity loan options, negotiate with lenders on your behalf, and take care of much of the application process.

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