Updated: December 23, 2024
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While having a low credit score may not disqualify you from getting a HELOC, it influences your loan terms. Lenders often hesitate to offer credit to those with lower scores because of the perceived risk. Lower credit scores frequently lead to higher interest rates.
Even with bad credit, getting a HELOC is possible with the right information and approach. We’ll explore what to consider before applying, the pros and cons, how to apply and ways to enhance your credit score.
Poor credit doesn't automatically result in HELOC denial, but it does lead to higher interest rates and stricter loan terms.
Many HELOC lenders require credit scores above 680, although some accommodate individuals with fair scores ranging from 580 to 660.
A HELOC is not always the best financing solution. Always explore alternatives like home equity or personal loans.
If you have a low credit score, adding more credit responsibility to your monthly finances can cause a lot of added stress. You have to ask yourself: are the extra funds worth the higher interest rates and often stricter loan conditions you may be subject to? Before you proceed with a home equity line of credit application, consider these factors:
Higher interest rates and more stringent loan terms are common if you have bad credit. This combination can significantly increase the cost of borrowing and will limit your use of the HELOC.
In addition to your credit score, lenders will also consider your employment history, income stability and debt-to-income ratio. A strong profile in these areas can improve your chances of approval.
Assess your current financial situation to ensure you can handle extra payments. Taking on a HELOC means committing to another monthly expense.
Determine if a HELOC is necessary for your situation. Sometimes, other financing options may better suit your needs and financial capacity.
While many HELOC lenders seek a FICO® Score of at least 680, their requirements vary. Some may set the bar higher, around 720, favoring applicants with stronger credit, but others accept scores as low as 580. Here are several HELOC lenders you can consider if your credit score is less than ideal.
Lower stands out as a HELOC lender, especially for homeowners with less-than-stellar credit. By accepting a credit score as low as 580, it offers a chance to tap into home equity where other lenders might not. It charges no annual fee, making it easier to manage costs without worrying about an extra yearly charge. Lender offers personalized support after an online application, ensuring borrowers with bad credit get the guidance they need, potentially offering a clearer path to better financial health.
Pros
Cons
Aven offers a unique product for homeowners with bad credit. Aven's product is a hybrid HELOC, working like a credit card backed by your home's equity. Homeowners with poor credit could benefit from the lack of origination and annual fees or prepayment penalties, keeping extra costs down. Additionally, its 0.25% rate reduction for setting up autopay could lower interest expenses over time. For a homeowner aiming to manage cash flow efficiently, the ability to cash out directly to a bank account with a one-time fee of 2.5% instead of enduring high-interest debt could be a game changer.
Pros
Cons
Spring EQ stands out as a HELOC lender, supporting homeowners across 43 states, even those with bad credit. Those with credit scores as low as 640 can access its services. It also allows a homeowner to borrow up to $500,000, which can be crucial for large-scale renovations or substantial expenses.
Pros
Cons
U.S. Bank offers no closing costs, easing financial burden by not requiring extra expenses upfront. Borrowers with less-than-stellar credit scores can reduce their interest rate by 0.5% by enrolling for autopay, making payments more manageable. The option to make interest-only payments during the draw period provides breathing room for those tight on funds, allowing them to only pay the interest on the amount they borrow for a while. U.S. Bank is accredited by the BBB, though currently does not have a rating.
Pros
Cons
Before making any financial decisions, carefully consider the advantages and disadvantages. If the drawbacks outweigh the benefits, it may be wise to explore alternative options.
Understanding the steps involved in applying for a HELOC with bad credit can significantly raise your chances of approval. Here’s a guide to help you through each stage of the application process.
Before you apply for a HELOC with bad credit, review your credit report. Identifying (and fixing) errors and understanding your score helps set realistic expectations and may uncover ways to improve your rating before applying.
Lenders examine your debt-to-income (DTI) ratio to assess your ability to manage new monthly payments. A lower DTI can make you a more attractive candidate, even with bad credit.
Your home's current market value helps determine how much equity you have and, consequently, the maximum potential loan amount. You might need an appraisal or a recent tax assessment to get a HELOC.
Estimate how much you could borrow using a HELOC calculator. Entering in your home's value, outstanding mortgage and credit score will give you a ballpark figure to set realistic expectations.
Some lenders are more receptive to homeowners with bad credit. Take the time to research and compare them. Focus on finding the lowest interest rates, fees and the best loan terms.
After choosing a lender, gather the required documents, such as proof of income, mortgage statements and home valuation.
Securing a HELOC with bad credit involves thorough preparation. Each step is a building block towards approval.
Even for homeowners with excellent credit, HELOCs are inherently tricky products to manage. HELOCs are long-term commitments; they can have adjusting rates, and repayment kicks in whether you're ready for full payments or not. So, if you are a homeowner with poor credit due to inabilities to manage debt in the past, you should truly be sure you're ready, willing and able to take on a significant amount of debt tied to your most precious investment. — Timothy Manni, Mortgage and Real Estate Consultant
Sometimes, getting a HELOC with bad credit isn’t the best move. Here are some alternative financing options that might have more favorable terms:
Alternative | What It Is | When It’s Better than a HELOC |
|---|---|---|
A loan where you borrow a lump sum using your home's equity as collateral, typically at a fixed interest rate. | Ideal for those needing funds for a specific project, like home renovations. It's a solid choice if you prefer predictable monthly payments and are uncomfortable with a HELOC’s variable rates. | |
You can refinance your existing mortgage for a higher amount than you owe and take the difference in cash. | Best when mortgage rates are low. It can work for consolidating high-interest debts, even with bad credit, while possibly securing a lower mortgage rate. | |
A loan for seniors (62+), allowing them to convert part of their home equity into cash without monthly mortgage payments. | It provides cash based on home equity but doesn't require repayment until the home is sold, making it a strategic option if you're retired and have limited income. | |
An unsecured loan based on creditworthiness, not requiring collateral. | Suitable for those who can manage possibly higher interest rates and terms but preferring not to use their home as collateral. | |
Shared Equity Agreement | An investor provides cash in exchange for a share of the property's future appreciation. | Fits those anticipating significant home value appreciation. It's an option if you're hesitant about regular loan payments or if your credit limits other borrowing methods. |
Navigating the HELOC application process with bad credit involves a lot of nuance and strategy. We’ve compiled a list of common questions to help you decide if it’s the best approach for you.
Good credit scores for HELOCs start at 680, showing lenders you're a lower-risk borrower. Scores below 580 are considered poor, making it challenging to secure favorable terms.
Yes, obtaining a HELOC with bad credit is possible. However, it may come with higher interest rates or stricter loan conditions.
Most lenders look for a minimum credit score of 680 for HELOC applicants. Some may accept lower scores with conditions such as higher equity or income.
Yes, lenders also evaluate your debt-to-income ratio, employment history, income stability and home equity.
Avoid a HELOC if the higher interest rates significantly increase your financial burden or if you're unsure about your ability to manage the additional debt responsibly.
You could explain to your bank that you are using the HELOC to pay off higher-interest-rate loans and actually allow your bank to pay them off for you first, out of your HELOC. This strategy dramatically improves the chances of your HELOC being approved, as the bank realizes and is assured that you aren't using your HELOC for a vacation but to reduce high-interest debt.
How to Improve Your Credit Score:
Before applying for a HELOC, work on improving your credit score by paying bills on time, reducing debt and addressing any errors on your credit report.
Build Equity: Increasing the equity in your home by making additional mortgage payments or waiting for the home's value to increase can improve your chances.
Offer Collateral: Providing additional collateral or assets to secure the loan might convince lenders to overlook your bad credit.
Cosigner: Consider finding a cosigner with good credit to strengthen your application. Having a consigner helps increase your score, even if slightly.
Shop Around: Some lenders specialize in offering HELOCs to individuals with bad credit, so shop around and compare options. Look for lenders with special offers.
All the conventional options for credit repair to increase your credit score apply to trying to obtain a HELOC. Making payments on time, prioritizing paying down higher-interest loans and reducing your overall borrowing that shows up on your credit report are good starts. You may also try to decrease your credit utilization by doing something relatively simple, like requesting a credit line increase. Other options involve increasing your home value by targeting high-impact-value add-ons to the home, which increases the collateral value spread the HELOC can draw against, which lowers the loan-to-value ratio for the HELOC lender.
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Ask an expertAbout Zachary Romeo, CBCA
Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.
