Does My Credit Score Matter When I'm Borrowing Against My Home?

Whenever you apply for a loan or credit card, you'll have a hard inquiry done on your credit report. A lender will also check your credit score to make sure it's not taking on too much risk in loaning you money.

If you have a higher credit score, it sends the message that you're someone who's timely with bills and doesn't tend to fall delinquent on debts. A lower credit score, on the other hand, sends the message that you may not have the strongest history of paying on time or managing your debt well.

Lenders need to be especially careful with borrower credit scores when giving out unsecured loans, like personal loans. These loans aren't tied to a specific asset, so if you default as a borrower, your lender may be out of luck.

Home equity loans, on the other hand, are secured. If you fail to repay a home equity loan, your lender could eventually force the sale of your home to get its money back.

Because of this, you might assume that your credit score doesn't matter when you're taking out a home equity loan. But here's why you're wrong.

Your lender still wants its money

It's true that in an extreme situation, a lender could force your home into foreclosure to recoup an unpaid home equity loan balance. But that could be a complicated, costly, and time-consuming endeavor.

Remember, lenders make money by collecting interest. They're not in the business of selling homes and figuring out what to do with the proceeds. So when a lender writes you a home equity loan, it still wants to make sure you're likely to pay it back. And while it can take some comfort in the fact that the loan is backed by the equity you have in your home, ultimately, it wants you to write out a monthly check.

That's why your credit score does matter when you're borrowing against your home. Even if you have plenty of equity, if your credit score is truly poor, it could stop you from getting approved for a loan.

The standards tend to be reasonable

Although you might need decent credit to qualify to borrow against your home, you don't necessarily need excellent credit. U.S. Bank, for example, says that to qualify for a home equity loan, you need a minimum credit score of 660. That's an OK credit score, but it's not outstanding.

This doesn't mean your credit score won't impact your loan's interest rate. The higher your score is, the more competitive an interest rate you're likely to snag. The point, however, is that while your credit score does matter when applying for a home equity loan, you don't necessarily need a top credit score to qualify.

That said, if you're interested in paying less for a home equity loan, then it makes sense to try to boost your credit score before you apply. If you have time, work on paying incoming bills promptly to boost your payment history. You can also try paying off some credit card balances, which might help if your current credit utilization is high.

Finally, check your credit report for errors. Perhaps a simple piece of incorrect information is dragging your credit score down. Getting it corrected could give your score a boost, leading to a more affordable home equity loan.