How to get a HELOC with bad credit
Quick insights
- To get a home equity line of credit (HELOC) with bad credit, strategic steps may help, such as building more home equity, lowering existing debt and maintaining a consistent payment history and income.
- Improving even a few areas of your financial profile (like paying down balances or correcting credit report errors) could possibly increase your approval odds.
- A HELOC with a lower credit score may come with stricter requirements and less favorable terms, but these vary by lender.
A HELOC is secured by your home. If you can’t repay, you could risk foreclosure. Many HELOCs have variable interest rates, so your payment amount can change over time. Fees and closing costs may apply depending on the lender and your loan terms.
Homeowners with lower credit scores may still qualify for a home equity line of credit (HELOC); approval requirements, rates and borrowing limits can vary by mortgage lender. Understanding what lenders typically look for may help you feel more prepared before applying.
What is the minimum credit score for a HELOC?
Minimum credit score requirements for a HELOC can vary by mortgage lender, but scores in the mid-600s are typically accepted. Borrowers with even lower credit scores may still qualify; it depends on factors like home equity, payment history, income and debt levels.
Here are the credit score ranges for FICO® scores:
- Poor: Below 580
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800+
Remember, your credit score is only one part of the HELOC application. “Bad credit” isn’t how lenders view credit scores, and lenders usually take a comprehensive view of a borrower and their application.
After applying, the lender typically:
- Reviews your credit and financial history
- Verifies your income and employment
- Orders a home appraisal
- Evaluates your available equity
- Requests additional documentation if needed
What other factors do HELOC lenders consider?
Your credit score helps lenders understand your borrowing history, but other details are reviewed in mortgage underwriting. Your assets and liabilities can also help a lender make its decision.
Available home equity
The amount of equity you’ve built in your home is important in HELOC approval decisions. Higher equity may qualify you for larger credit lines or more flexible loan terms, even with a credit score below the lender’s preference.
Debt-to-income ratio (DTI)
Lenders often compare your monthly debt obligations to your gross monthly income. The resulting figure is your DTI, and a lower DTI may suggest you have enough income available to comfortably handle repaying a HELOC.
Employment and income
Stable income could reassure mortgage lenders that you are able to repay a HELOC over time. Based on your employment type, lenders may ask for:
- Recent paystubs
- W-2s or tax returns
- Bank statements
- Proof of additional income sources
Mortgage payment history
If you’ve consistently paid your mortgage on time, that positive history may strengthen your HELOC loan application, even if your credit score is lower than the lender’s preference.
Cash reserves
Some mortgage lenders may feel more comfortable approving borrowers with emergency savings or reserve funds available after closing on a HELOC.
Can you get a HELOC with bad credit?
A low credit score may not disqualify you for a home equity line of credit (HELOC). Qualification depends on the lender’s requirements, which can vary from one to the next. Your full financial profile and current equity are considered, and taking strategic steps before applying may strengthen the application.
1. Review your credit reports for errors
Read carefully to find any inaccurate information that could be lowering your credit score, such as:
- Incorrect late payments
- Outdated account balances
- Duplicate collection accounts
- Accounts that don’t belong to you
Correcting reporting errors may help improve your credit score over time.
2. Pay down existing debt balances
Reducing high balances could improve your credit utilization and DTI. Like their credit score requirements, lenders may prefer borrowers have a certain DTI when evaluating a HELOC application.
3. Prepare your financial documents
Having these ready can make the application process faster. And if lenders ask for additional documents, responding with them quickly can demonstrate your preparedness. Common documents needed for a HELOC application include:
- Government-issued ID
- Recent paystubs
- W-2s or tax returns
- Bank statements
- Mortgage statements
- Homeowner’s insurance information
- Proof of additional income or assets
Self-employed borrowers may need to provide additional documents, such as business tax returns, profit and loss statements, 1099s or business bank statements.
4. Estimate how much equity you have
Many mortgage lenders require you to maintain a certain amount of equity after opening a HELOC. That means you cannot get a HELOC for the entire amount of your home equity. Still, estimating this may help you know what to expect.
5. Compare multiple HELOC lenders
Qualification standards, fees and rate structures can vary widely from lender to lender. Comparing options carefully may help you identify lenders that work with a broader range of credit profiles. For example, Chase offers both a home equity line of credit (HELOC) and cash-out refinance options.
When comparing mortgage lenders, here are some key details:
- Minimum credit score requirements
- Interest rate structures
- Closing costs or annual fees
- Draw period length
- Repayment terms
Alternatives to a HELOC if you have a low credit score
If qualifying for a HELOC feels challenging right now, other products may be worth exploring.
Home equity loan
A home equity loan typically provides a lump sum with a fixed interest rate and loan term. This structure may appeal to borrowers who prefer predictable payments.
Cash-out refinance
A cash-out refinance replaces your current mortgage with a larger loan. You receive the difference in cash. Because you’re replacing your current mortgage, whether this option makes financial sense depends on current mortgage rates and other factors.
In summary
You may still be able to get a HELOC with bad credit or explore other financing options if the rest of your finances are strong. A lower credit score may seem like an obstacle, but lenders evaluate more than just your score on a HELOC application. Requirements and terms vary by lender. Helpful steps before you apply include calculating your current equity and comparing lenders to see how a HELOC fits into your situation.
