Home Equity

How to Get a HELOC With Bad Credit

July 23, 2021

Updated July 13, 2023

Need help getting a bad credit HELOC? Keep reading to learn your options.

If you’re a homeowner looking to pay down high-interest debt or finance home renovations, there are always options whether you are paying to a mortgage lender or non-QM lenders.

For example, you can convert some of your home equity into cash with the help of a home equity line of credit (HELOC). A HELOC can help you pay for ongoing expenses such as home renovations or monthly bills, and you can even use a HELOC to pay off mortgage payments. However, those with poor credit history may worry about their options.

If you’re wondering if you can get a HELOC with bad credit, there’s good news. It’s possible, although a little more challenging.

Below, we’ll explain how you can boost your chances of getting a HELOC loan with bad credit. We’ll also discuss other ways you can access cash through your home’s equity.

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a financial tool that allows homeowners to tap into the equity they’ve built up in their homes. Often considered a type of second mortgage, a HELOC works more like a credit card than a traditional loan. You’re given a credit limit based on the value of your home and other qualifying factors, and you can draw funds up to that limit as needed. The interest rates for a HELOC are usually variable, meaning they can fluctuate over time.

A HELOC is often used for large expenses such as home renovations, education, or consolidating high-interest debt. One of the key advantages of a HELOC is its flexibility; you only pay interest on the amount you’ve borrowed, not your entire credit limit.

Can You Get a HELOC With a Low Credit Score?

Yes, it is possible to get a Home Equity Line of Credit (HELOC) with a low credit score, but it may be more challenging to get approved, and it will likely come with higher interest rates.

How Is My HELOC Amount Determined?

The amount you can borrow through a HELOC is determined by several factors:

Home Value: HELOC lenders will typically conduct an appraisal to find out the current market value of your home.
Loan-to-Value Ratio (LTV): This is calculated by dividing your mortgage balance by your home’s appraised value. Most lenders offer HELOCs up to an LTV ratio of 80-85%.
Debt-to-Income Ratio (DTI): Lenders look at your monthly debts in relation to your monthly income to assess your ability to manage payments.
Credit Score: While it’s possible to get a HELOC with bad credit, a higher credit score will generally get you a larger credit limit and a lower interest rate.
Stable Income: A consistent and reliable income can also influence the amount you’re eligible to borrow.

As you can see, your credit check is a key part of the process, but it’s not the only factor that matters. If your credit limit allows, even with bad credit, a HELOC can still be a viable option.

What Is the Minimum Credit Score for a HELOC?

Most lenders require you to have a credit score of 620 or above to qualify for a HELOC. Some lenders have credit score requirements as high as 680.

If you have a low credit score, you may still be able to find a lender that’s willing to work with you. You’ll just need to shop around for a flexible home equity lender.

You can increase your HELOC approval chances by ensuring the rest of your application is strong enough to make up for your poor credit score.

How Can I Get a HELOC With Bad Credit?

To boost your chances of getting approved for a HELOC with bad credit, it helps to have:

Substantial equity in your home
A low debt-to-income ratio (well below the required 43% minimum)
Stable employment history
A high-paying job that provides a reliable income
History of making on-time debt payments
A good credit limit to build your application on

Even if you check all of these boxes, having a good credit score can make the application process much easier. It can also help you qualify for more favorable HELOC terms.

For these reasons, you may want to wait a few months before you apply for a HELOC. During this time, you can do the following things to build credit and better your Vantage or FICO credit score, such as:

Disputing any errors on your credit report
Paying off debts that have gone to collection agencies
Holding off from applying for new credit for six to 12 months
Making all of your credit payments on time

If you have a friend or family member with excellent credit, you could also ask if they’re willing to add you as an authorized user on a credit account.

Additionally, you can apply for an installment loan, which if managed properly, can also help you build credit.⁶

Tip: In general, it’s typically not cost-effective to pay to get your credit report fixed by a credit repair company, as you can dispute any errors on your credit report yourself, for free.

Risks of Getting a HELOC With Bad Credit

Even if you get approved for a bad credit HELOC, the loan term may not be as great as you hoped.

Borrowers with bad credit typically receive HELOCs with higher interest rates. If you’re pursuing a HELOC in hopes of securing a lower interest rate, you may be disappointed with your lender’s offerings.

Additionally, you’ll have to take on the risk of potentially losing your home. A bad credit score often indicates that you’ve struggled to repay your debts on time in the past. When it comes to home equity credit lines you don’t want to make this mistake. After all, defaulting on your HELOC payments can end in foreclosure.

HELOC Alternatives For Bad Credit

Fortunately, a HELOC isn’t your only option for borrowing money with bad credit. You can also look into:

Home equity loans – If you are wondering if you can access your home equity with bad credit, the answer is yes. A home equity loan lets you borrow money from your equity in a lump sum. Home equity loans are a fixed rate option with a loan term of 10 to 20 years.

The credit score requirements for home equity loans are similar to those for HELOCs. If you have bad credit, some home equity lenders may approve your loan application, but you’ll have to fulfill additional requirements.

Sale-leaseback programs – A great alternative for homeowners with bad credit is a sale-leaseback program. These programs let you access your home equity without filling out any loan applications, paying costly interest fees or closing costs, or moving out of your home. All you have to do is sell your home and lease it back from the buyer.
Cash-out refinancing – With a cash-out refinance, you replace your current mortgage with a new mortgage for a larger loan amount. You can pocket the difference in cash to use towards personal expenses.

To qualify for a cash-out refinance, you generally need at least 20% equity in your home and a credit score of 620 or above. However, the credit score requirements can be a little more flexible than with a home equity loan or HELOC.
Just keep in mind the pros and cons of refinancing, and that refinancing your mortgage will adjust all of its terms. You may end up with a much higher interest rate and monthly payment amount than you have right now due to your bad credit score.

Unsecured personal loans – Unsecured personal loans let you borrow money without putting up any collateral. Unlike a secured loan, they come with a shorter loan term or repayment period, fixed interest rate, and a smaller loan amount than HELOCs.

Unsecured personal loans often have a higher interest rate than their equity-backed counterparts. As with home equity credit lines, most lenders require you to have a good credit score to qualify for a personal loan, though some lenders create personal loans specifically for borrowers with bad credit.

Reverse mortgages – If you’re 62 or older and have sufficient equity in your home (over 50%), you may qualify for a reverse mortgage loan. It lets you borrow money from your home equity in a lump sum, revolving line of credit, or monthly payment schedule.

payment schedule.

With this form of financing, you don’t need to repay any money as a borrower until you sell your home or pass away. As a result, your mortgage balance will increase over time. Fortunately, there’s no minimum credit score requirement to qualify for a reverse mortgage. However, a reverse mortgage may not be a viable option if you plan to move out of your home in the future or leave your home as an inheritance. Be sure to educate yourself on the pros and cons of reverse mortgages for retirement and how to get out of a reverse mortgage if need be.

Sale-Leaseback: A HELOC Alternative

When you need to borrow money, a bad credit score can significantly limit your options. Even if you get approved for a HELOC with bad credit, it may not be the best choice for your financial health due to the less favorable terms you’ll receive.

Whether it’s because you’re trying to access home improvement loans with bad credit or need a HELOC for credit card debt consolidation, a sale-leaseback program does not have any credit score requirements.

Instead, a sale-leaseback solution helps you unlock your equity so that you can meet your financial goals, whether they entail buying a vacation home or enjoying your retirement. You sell our home and lease it back for as long as you want, allowing you to convert your home’s equity to cash. Learn more about sale-leaseback benefits today.

Key Takeaways

Need help getting a HELOC with bad credit? If you’re a homeowner looking to pay down high-interest debt or finance home renovations, there are always options whether you are paying to a mortgage lender or non-QM lenders. If you are still unsure of alternative options to getting a HELOC with a bad credit score, after reading this article, consult a financial advisor or loan officer to discuss your options.

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