Can I Get a HELOC With Bad Credit?

What is a HELOC?

If you’ve built up enough equity in your home, using that equity to fund home improvements or reach other financial and lifestyle goals can be an appealing option. However, if you’ve faced financial struggles in the past, your credit history may make you hesitant. The good news is that a rough financial past doesn’t have to be a permanent barrier. You can work toward securing a Home Equity Line of Credit (HELOC) even with bad credit by taking consistent steps in the right direction.

Although Avanti Way Financial doesn’t offer HELOCs directly, the advice and tips shared here can help you on your journey toward qualifying for a HELOC or any other funding option.

Can You Get A Home Equity Line of Credit With Bad Credit?

“Bad” credit is a subjective term. Lenders prefer looking at factual data rather than labels. To help you understand where you stand, here are the credit score ranges used by most financial institutions, based on the standards provided by the Fair Isaac Corporation (FICO):

Generally, you’ll need at least a “fair” credit score (580 or higher) to apply for a HELOC. In fact, only 4.6% of HELOCs issued were granted to clients with subprime credit scores (below 620). Though this number is low, it’s not impossible to qualify for a HELOC with a lower score.

What is the Lowest Credit Score You Can Have?

While there isn’t a specific HELOC designed for individuals with poor credit, different lenders have varying standards. Some lenders may approve you with a score of 620, while others may require a score of 680 or higher for more favorable options.

What Factors Can Disqualify You for a HELOC?

Before you start the process of qualifying for a HELOC, it’s crucial to understand the factors that could disqualify you. Here are some key considerations:

• Credit Score: If your score is below 680, your options may be limited, though some lenders might still approve you with a score of 620 or higher.
• Negative Events on Your Credit Report: Things like bankruptcies or foreclosures often come with waiting periods before you’re eligible for approval.
• Low Equity: Lenders typically require you to retain a minimum amount of equity in your home. This amount could be as much as 35%-40%, meaning you need enough equity to make the loan viable.

Is It A Good Idea To Get A HELOC If You Have Bad Credit?

HELOCs with lower credit scores usually come with higher interest rates, which could mean paying thousands more over the life of the loan. Because of this, it may be worth considering waiting until you’ve improved your credit score before applying.

However, if you need immediate funds despite bad credit, you may want to explore alternatives like personal loans or credit cards. While these options tend to have higher interest rates, they don’t require you to put your home up as collateral, making them potentially less risky.

How To Get A HELOC With Bad Credit

If you’re aiming for a HELOC with bad credit, follow these steps to give yourself the best chance of success.

1. Check Your Credit Start by checking your credit score to see where you stand. If your score is lower than expected, don’t be discouraged—there are ways to improve it. Knowing your starting point is the first step toward getting on the right path.

2. Improve Your Credit It can be easy to feel overwhelmed by a bad credit score, but taking action is key. Here’s how to improve your credit:

   • Dispute Inaccuracies: If you find mistakes on your credit report, dispute them to remove any incorrect information. You could also be a victim of identity theft, so take the necessary steps to protect yourself.
   • On-Time Payments: Your payment history accounts for 35% of your FICO score. Ensuring you make timely payments will have a significant impact.
   • Pay Down Debt: Focus on paying down credit card debt first, as this improves your credit utilization rate, which plays a big role in your score. Reducing your debt-to-income ratio (DTI) by paying off high monthly payment debts also helps.

3. Determine How Much You Can Borrow The amount you can borrow with a HELOC depends on your home’s equity and your current mortgage balance. Many lenders allow you to borrow up to 60% to 65% of your home’s value, including your current mortgage.

   For example, if your home is valued at $600,000 and your mortgage balance is $200,000, you have $400,000 in equity. However, with a borrowing limit of 60%-65%, you could only access $240,000-$260,000 through a HELOC.

4. Shop Around For The Right Lender Different lenders have different credit requirements. It’s worth shopping around to find one that offers more flexible standards. Additionally, finding a lender with better interest rates can significantly reduce the total cost of the loan.

5. Gather The Necessary Documents As a second mortgage, a HELOC requires you to submit various documents for approval. These may include:

   • Full legal name
   • Social Security number
   • Date of birth
   • Government-issued photo ID
   • Most recent paystubs
   • Tax returns for the last two years
   • Recent bank statements
   • Proof of homeowners insurance coverage

6. Apply for the HELOC After selecting a lender and preparing your documents, submit your application. Be ready for additional questions or requests from the lender, such as updated income information or a new appraisal. Responding promptly will help streamline the process.

Pros and Cons of Getting a HELOC with Bad Credit

Pros:

• Flexible Use of Funds: HELOCs offer flexibility, allowing you to access funds on an as-needed basis.
• Flexible Repayment: The draw period typically offers interest-only payments, which can help manage your budget.
• Tax-Deductible Interest: If the funds are used for home improvement, you might be able to write off the interest.
• Potential Credit Score Improvement: On-time payments can improve your credit score over time.

Cons:

• Risk of Losing Your Home: Since a HELOC is secured by your home, failing to make payments could result in losing your property.
• Variable Interest Rates: The interest rates on HELOCs can change over time, making it difficult to budget.
• Adding Debt: A HELOC means additional debt, which could strain your financial situation.
• Risk of Overborrowing: The ability to withdraw funds as needed can be tempting, leading to overspending.
• Higher Payments Later: After the draw period ends, you’ll need to pay back both principal and interest, which could result in higher monthly payments.

Alternatives to a HELOC with Bad Credit

If a HELOC isn’t the best option for you, consider these alternatives:

• Home Equity Loan: A lump sum loan that allows you to borrow a set amount, often with fixed rates.
• Cash-Out Refinance: Refinance your mortgage and take out the difference in cash. This can sometimes offer better rates than a second mortgage.
• Personal Loan: An unsecured loan that doesn’t put your home at risk, but usually comes with higher rates.
• Credit Cards: If you qualify for a low-interest credit card, this could be a useful solution for small to moderate expenses. Just ensure you have a plan to repay it within the promotional period.

The Bottom Line: You Can Work Toward A HELOC With Bad Credit

Tapping into your home equity can be a great way to access the funds you need. While improving your credit before applying for a HELOC is advisable, bad credit doesn’t automatically mean you’re out of options. With consistent effort, you can improve your credit and make home equity financing work for you.

At Avanti Way Financial, we’re here to help guide you through the process and explore the best options for your financial future. If you’re ready to take the next step, let’s talk about how we can help you find the right solution.