How to Get a HELOC With Bad Credit
Updated: April 26, 2024
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While having a low credit score may not disqualify you from getting a HELOC, it influences your loan terms. Lenders often hesitate to offer credit to those with lower scores because of the perceived risk. Lower credit scores frequently lead to higher interest rates.
Even with bad credit, getting a HELOC is possible with the right information and approach. We’ll explore what to consider before applying, the pros and cons, how to apply and ways to enhance your credit score.
Consider This Before Applying for a HELOC With Bad Credit
If you have a low credit score, adding more credit responsibility to your monthly finances can cause a lot of added stress. You have to ask yourself: are the extra funds worth the higher interest rates and often stricter loan conditions you may be subject to? Before you proceed with a home equity line of credit application, consider these factors:
HELOC Lenders for Those With Bad Credit
While many HELOC lenders seek a FICO® Score of at least 680, their requirements vary. Some may set the bar higher, around 720, favoring applicants with stronger credit, but others accept scores as low as 580. Here are several HELOC lenders you can consider if your credit score is less than ideal.
- Lower
- 8.75% to 13.5%APR Range
- $15,000 to $500,000Loan Amount Range
- 580Minimum Credit Score
- 10-year draw period; undisclosed repayment period Repayment Terms
- NoneAnnual Fees
Lower stands out as a HELOC lender, especially for homeowners with less-than-stellar credit. By accepting a credit score as low as 580, it offers a chance to tap into home equity where other lenders might not. It charges no annual fee, making it easier to manage costs without worrying about an extra yearly charge. Lender offers personalized support after an online application, ensuring borrowers with bad credit get the guidance they need, potentially offering a clearer path to better financial health.
Pros
- A+ rating from BBB
- Minimum loan amount is $15,000
- Provides personalized support
Cons
- No rate discounts offered
- Does not offer fixed-rate HELOC
- Undisclosed repayment period
- Aven
- 7.99% to 15.49%APR Range
- Up to $250,000Loan Amount Range
- 620Minimum Credit Score
- Unlimited draw period; 5 to 10-year repayment period for cash out;Repayment Terms
- NoneAnnual Fees
Aven offers a unique product for homeowners with bad credit. Aven's product is a hybrid HELOC, working like a credit card backed by your home's equity. Homeowners with poor credit could benefit from the lack of origination and annual fees or prepayment penalties, keeping extra costs down. Additionally, its 0.25% rate reduction for setting up autopay could lower interest expenses over time. For a homeowner aiming to manage cash flow efficiently, the ability to cash out directly to a bank account with a one-time fee of 2.5% instead of enduring high-interest debt could be a game changer.
Pros
- Provides a home equity-backed credit card
- 2% unlimited cashback on purchases
- Autopay reduces rate by 0.25%
- No fees for origination, annual and prepayment
Cons
- Highest possible APR over 15%
- Up to $250,000 limit, $100,000 in some states
- Charges 2.5% fee for cashouts/transfers
- Spring EQ
- UndisclosedAPR Range
- Up to $500,000Loan Amount Range
- 640Minimum Credit Score
- up to 10-year draw period; up to 20-year repayment periodRepayment Terms
- UndisclosedAnnual Fees
Spring EQ stands out as a HELOC lender, supporting homeowners across 43 states, even those with bad credit. Those with credit scores as low as 640 can access its services. It also allows a homeowner to borrow up to $500,000, which can be crucial for large-scale renovations or substantial expenses.
Pros
- Accepts credit scores from 640
- Borrow up to $500,000
- A+ rating from BBB
Cons
- Does not disclose APR ranges
- Approval and funding can take up to 3 weeks
- Unclear about early closure penalties
- U.S. Bank
- 8.95% to 13.1%APR Range
- 660Minimum Credit Score
- $15,000 to $750,000Loan Amount Range
- 10-year draw period; up to 20-year repayment periodRepayment Terms
- Up to $75Annual Fees
U.S. Bank offers no closing costs, easing financial burden by not requiring extra expenses upfront. Borrowers with less-than-stellar credit scores can reduce their interest rate by 0.5% by enrolling for autopay, making payments more manageable. The option to make interest-only payments during the draw period provides breathing room for those tight on funds, allowing them to only pay the interest on the amount they borrow for a while. U.S. Bank is accredited by the BBB, though currently does not have a rating.
Pros
- No closing costs
- Fixed-rate option available
- Lets you prequalify online
Cons
- Closing must be done in person
- Charges an annual fee of $75
- Early closure fee up to $500
Pros and Cons of Getting a HELOC with Bad Credit
Before making any financial decisions, carefully consider the advantages and disadvantages. If the drawbacks outweigh the benefits, it may be wise to explore alternative options.
How to Apply for a HELOC With Bad Credit
Understanding the steps involved in applying for a HELOC with bad credit can significantly raise your chances of approval. Here’s a guide to help you through each stage of the application process.
Check your credit standing
Before you apply for a HELOC with bad credit, review your credit report. Identifying (and fixing) errors and understanding your score helps set realistic expectations and may uncover ways to improve your rating before applying.
Calculate your DTI ratio
Lenders examine your debt-to-income (DTI) ratio to assess your ability to manage new monthly payments. A lower DTI can make you a more attractive candidate, even with bad credit.
Assess your home’s value
Your home's current market value helps determine how much equity you have and, consequently, the maximum potential loan amount. You might need an appraisal or a recent tax assessment to get a HELOC.
Understand how much you can borrow
Estimate how much you could borrow using a HELOC calculator. Entering in your home's value, outstanding mortgage and credit score will give you a ballpark figure to set realistic expectations.
Research bad credit HELOC lenders
Some lenders are more receptive to homeowners with bad credit. Take the time to research and compare them. Focus on finding the lowest interest rates, fees and the best loan terms.
Submit your application
After choosing a lender, gather the required documents, such as proof of income, mortgage statements and home valuation.
Securing a HELOC with bad credit involves thorough preparation. Each step is a building block towards approval.
Even for homeowners with excellent credit, HELOCs are inherently tricky products to manage. HELOCs are long-term commitments; they can have adjusting rates, and repayment kicks in whether you're ready for full payments or not. So, if you are a homeowner with poor credit due to inabilities to manage debt in the past, you should truly be sure you're ready, willing and able to take on a significant amount of debt tied to your most precious investment. — Timothy Manni, Mortgage and Real Estate Consultant
Alternatives to HELOCs If You Have Bad Credit
Sometimes, getting a HELOC with bad credit isn’t the best move. Here are some alternative financing options that might have more favorable terms:
Frequently Asked Questions About Bad Credit HELOCs
Navigating the HELOC application process with bad credit involves a lot of nuance and strategy. We’ve compiled a list of common questions to help you decide if it’s the best approach for you.
Good credit scores for HELOCs start at 680, showing lenders you're a lower-risk borrower. Scores below 580 are considered poor, making it challenging to secure favorable terms.
Yes, obtaining a HELOC with bad credit is possible. However, it may come with higher interest rates or stricter loan conditions.
Most lenders look for a minimum credit score of 680 for HELOC applicants. Some may accept lower scores with conditions such as higher equity or income.
Yes, lenders also evaluate your debt-to-income ratio, employment history, income stability and home equity.
Avoid a HELOC if the higher interest rates significantly increase your financial burden or if you're unsure about your ability to manage the additional debt responsibly.
sources
- MyFico. "Credit Checks: What are credit inquiries and how do they affect your FICO® Score?." Accessed April 22, 2024.
- Internal Revenue Service. "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)." Accessed April 22, 2024.