How to get a home equity line when you have bad credit
A home equity line of credit (HELOC) can be very beneficial to borrowers who need some cash and have equity in their homes. You may not think that you can get a HELOC if you have bad credit, but you may very well still be approved. Before we get to that, let's first talk about the typical requirements to qualify for a HELOC.
Debt-to-income ratio
The less debt a borrower has compared to their income level, the lower the perceived risk to a lender. The lower the DTI, the lower the interest rates. At some point--and this depends on other factors in your application--a DTI that is too high may lead to the rejection of your application.
Loan-to-value ratio
Another number that's looked at is the loan-to-value (LTV) ratio, which is what you can borrow, limit-wise. Here's an example of how this works:
Let's say your home's current market value is $425,000, but you still owe $200,000. Your LTV ratio would be 47%, calculated by dividing the money you still owe ($200,000) by the current market value (425,000).
A related ratio is the Combined Loan to Value (CLTV). This works just like the LTV, but it adds in the new loan you’re applying for. In the example above, if you’re applying for a $50,000 HELOC, then your CLTV will be ($200,000+$50,000) / $425,000, or 58.8%.
Credit scores
FICO scores are an important part of the loan underwriting process. The lower your FICO score, the higher the interest rate that you will typically be offered. Figure requires a FICO score of at least 600, and each lender has their own requirements. Check our guide to credit scores to learn more.
Personal history
To establish creditworthiness, lenders like to see a pattern of on-time payment history with stable employment and steady income. Some lenders may also ask for three to five references on the application to speak on the borrower's behalf regarding their character and financial history.
If you don't meet the basic credit requirements
If your numbers don't meet the standard criteria of a home equity line, there are some lenders who specialize in non-prime home equity loans. These lenders are subject to oversight by the Consumer Finance Protection Bureau (CFPB). These loans may be ideal for borrowers who want a Home Equity Line but have low FICO scores.
Before applying for a home equity line
Check your credit report and credit score to fix any errors. It's not unusual for a creditor to be on the report long after they should have been removed. If you see items like this, contact the creditor and dispute it with the credit agency (Transunion, Equifax, or Experian) that applies.
Make sure your credit card usage is kept to a minimum, and that your debt utilization is below 30% on any cards you use. Try not to max out any cards or open up any new lines of credit as they'll show up as credit inquiries. Too many of those can hurt your credit score.
Shop around for the best rates
With the power of the internet, you have lenders available at the click of a mouse. You can search around and find the best rates and terms for your financial situation.
Have your paperwork in order
These are the items you'll need when applying for a home equity line, including:
Your name
Social security number
Photo ID
Any personal information that applies to a co-signer or spouse
Your tax returns for the last two years
Proof of employment and income
Homeowner's insurance policies
Estimated property value and records of property tax paid
Your bank statements for the previous two months
Information on any other assets or properties that you own (mortgage statements, homeowner's insurance, property taxes, homeowner's association dues, etc.)
For loans at Figure, you don’t need to gather any paperwork--just be sure that you have online access to the relevant accounts, such as your account at the IRS.
