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Can I get a HELOC if I have a low credit score?
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Can I get a HELOC if I have a low credit score?

How does bad credit affect HELOC eligibility?

It is possible to get a Home Equity Line of Credit (HELOC) or Home Equity Loan with a low credit score, but it depends on a number of factors, including your actual credit score and how much equity you have in your home. If you do have bad credit, there are some steps you can take to improve your HELOC eligibility. 

Key Points:

  • A home equity line of credit (HELOC) can help you gain control of your finances, by reducing monthly payments, consolidating debt into one payment, and reducing overall interest being paid

  • HELOC lenders look at how much home equity you have accrued, your credit history and credit score, your income, and your debts

  • Borrowers with lower credit scores may need to provide additional income information, have a lower debt utilization ratio, and have built up more than 20% equity in their home

Can I get a HELOC with a bad credit score?

It is possible to get a home equity loan with bad credit, however, the likelihood of approval depends upon various factors and the specific lender requirements. Generally, lenders use an applicant's FICO score as a marker for eligibility. If you have anything between 620 and 700, you may be able to qualify. With a credit score lower than 600 can be more difficult to secure a HELOC, but not impossible (read our tips below to improve your qualifications in light of bad credit). 

Other requirements will also need to be met in order to qualify. Built-up equity in the property is typically required to gain approval from banks or lenders. Equity refers to the amount of your home that you own in comparison to what is still owed to the bank on your primary mortgage. Most lenders require borrowers to have 15-20 % equity, but borrowers with lower credit scores tend to require higher equity levels.

In addition to credit score and home equity requirements, lenders will also assess your income and debt-to-income ratio (DTI) when considering your application for a home equity loan. The DTI signifies the percentage of your monthly gross income that would be allocated towards existing debts, which most lenders cap at around 43%. However, if you have a low credit score some lenders may require significantly lower DTIs for consideration. Displaying responsible financial behavior will help to increase your chances of loan approval despite having a suboptimal credit history.

What is a HELOC?

A HELOC, or home equity line of credit, is a form of home equity borrowing similar to a traditional home equity loan. However, a HELOC is a revolving line of credit, like a credit card, from which you can withdraw funds and pay them off. During the first portion of a HELOC, the draw period, you are able to withdraw funds from your maximum credit limit, as needed. During the repayment period, you can no longer withdraw funds and must pay back your outstanding balance.

Unlike credit cards and personal loans, a HELOC is secured by the equity in your home. This means that interest rates are substantially lower, but it also means you risk losing your home to foreclosure if you cannot pay back your loan in agreement with your loan terms. 

Significant variance exists in HELOC lenders. When shopping around, look for loan terms (how long you will have in the draw and repayment periods), interest rates, interest type (variable-rate or fixed-rate), and types of fees charges (usage fees, annul fees, early prepayment fees, etc.). 

Factors that affect HELOC eligibility

A HELOC can be a smart financial choice for those looking to pay off other forms of debt, remodel or improve their home, fund a business venture, or pay for emergency expenses. This is because a HELOC comes with less risk and access to more capital than unsecured loans (such as credit cards, personal loans, medical loans, and small business loans), and also comes with a notably lower interest rate. But before you can do that, you need to qualify. Accessing this type of financing becomes more difficult if you have a poor or low credit score. 

HELOC eligibility is fairly straightforward, but exact requirements will vary from lender to lender. The most important factor is being a homeowner who has built up equity in your home. Most lenders require a minimum of 20% equity in your home. That is, if your home is worth $200,000 in the current market, you should own at least $40,000 in your home. With a lower credit score, you will likely need to demonstrate a higher amount of equity in your home to show responsibility. 

Credit score will also impact your eligibility. Those with a higher credit score will have access to more capital and lower interest rates. Generally, lenders prefer borrowers with FICO scores over 620, however, having a lower score does not in and of itself prohibit you from qualifying for a HELOC. 

Lenders will also look at your debt-to-income ratio (how much debt you have in comparison to your ability to pay your debt) and your utilization-to-limit ratio (how much of your current available credit you are using). The lender wants to protect their investment by making sure they believe you will be able to pay the credit line back. 

How to get a HELOC if you have bad credit

Qualifying for a home equity loan or home equity line of credit (HELOC) with bad credit can be challenging, but it’s not impossible. For those whose credit scores are lower than ideal, the process of acquiring these forms of loans may require a few additional steps, but will still be achievable.

The first step is to review your credit reports from the three major credit agencies and repair any mistakes on your credit reports. Contact the lenders to request a correction in the misinformation, and if necessary, use a credit dispute agency. This will build up a positive payment history, which should gradually boost your credit score.

Additionally, individuals looking for this type of loan with a bad credit history should know how much equity they have in their home and know they may be required to have a larger portion of equity built up in order to qualify. Having more than 20% equity in your home helps prove that they are ready and willing to invest in your home while showing lenders that they will adhere to any repayment plans put into place.

Before applying for a HELOC, those with poor credit will want to reduce debt utilization (or borrowing-to-limit ratio) on existing credit lines and demonstrate a higher debt-to-income ratio. This will demonstrate to lenders that you are financially responsible, despite blips in your credit history. 

Furthermore, borrowers may want to consider applying with lenders who offer special programs for people in certain situations like poor or no credit histories. This may significantly increase the chances of a borrower being able to obtain a loan with bad credit. Ultimately, if an individual takes the time and effort necessary to build their credibility from both a financial and trustworthiness perspective, it should pay off as more lenders become willing to do business with them and offer loans at competitive interest rates.

The takeaway

In order to get a HELOC, you will need to demonstrate to lenders that you will be able to repay. One way that lenders assess this is through your credit score. Having a low credit score may make it harder to qualify for a HELOC, but it doesn't make it impossible. Start by checking your credit score and building up more equity in your home. Address any incorrect information on your credit score and work to decrease your overall debt load in order to improve your application. A HELOC is a great way to get your finances under control due to low interest rates, so once you qualify it can be used as a tool for building credit history and improving your credit score. Applying for a Figure HELOC takes less than 5 minutes and can help you regain control of your finances. 


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