Can I get a HELOC with bad credit? HELOC credit guidelines

November 29, 2022 - 7 min read

What credit score do you need for HELOC?

You typically need a credit score of at least 680 to qualify for a HELOC, although requirements can vary from one lender to the next. Some lenders may allow bad credit scores if have a good debt-to-income ratio or a lower HELOC loan amount.

Keep in mind that your credit score doesn’t just determine your eligibility. It also affects your HELOC interest rate and how much you can borrow. So get quotes from a few different lenders to compare requirements and HELOC rates for your situation.

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What’s the lowest possible credit score for a HELOC?

Most home equity line of credit (HELOC) lenders require a minimum credit score of 680. But each lender gets to set its own guidelines, and a few may allow scores as low as 620. Be aware that these lenders are much less common — and they might have additional requirements to make up for your low credit score.

For instance, if you want to get a HELOC with bad credit, you might need “compensating factors” like a low debt-to-income ratio (DTI) or a smaller loan amount. And your interest rate could be significantly higher, too.

“Some lenders will give loans [HELOCs] to people with credit scores under 620, but they may want the borrower to have more home equity and less debt than their income. These loans may also have shorter terms and higher interest rates,” cautions Lyle Solomon, a financial expert and attorney with Oak View Law Group. He recommends that “If you want good terms for your HELOC, you should aim for a credit score of 700 or more.”

What counts as “bad credit” for a HELOC?

Credit scores of 579 or lower will label you as having “bad credit.” If you are in this category, it likely means you haven’t paid your bills on time or have issues in your credit history.

If you have bad credit (below 580) or fair credit (580-669) it can be harder to get approved for a HELOC. You’re less likely to find a willing lender, and interest rates may be high enough to deter you from borrowing at all.

“Lenders rarely settle for HELOCs for people with a credit score lower than 600 unless they agree to a miserably high interest rate,” says Donald Shurts, a Realtor with Keller Williams Advisors Realty. "[Some] lenders might go easy, but most of them don’t because the risk is too high.”

If your credit score is 680 or higher, you should be able to get approved for a HELOC more easily — and at a much fairer rate.

How to get a HELOC with bad credit

If your credit score is below the typical 680 requirement, you might still get approved for a HELOC. Your first step should be to look for a lender with more flexible guidelines. “Look for lenders who don’t have any minimum standards or specifications mentioned” on their websites, recommends Shurts.

You should also make sure the rest of your financial profile looks solid so lenders won’t note any additional red flags.

1. Maintain a clean credit history

To improve your odds of getting approved for HELOC with bad credit, follow these best practices:

  • Review your three free credit reports carefully and work to correct any mistakes or errors you notice
  • Pay each of your bills punctually. “Make at least the minimum payment due, but try to pay off the balance in full if you can every month with every bill,” suggests Solomon
  • Avoid maxing out your credit cards or applying for any new ones. When you max out and continue to add more credit accounts, you will have a higher credit utilization ratio, which is a big red flag for lenders
  • Don’t cancel your existing credit cards. Even if you don’t use the cards in your wallet, avoid closing the accounts, which would increase your credit utilization ratio and trigger a lower credit score

Remember that your credit score and credit history are two separate things. If your score is low but you have a clean borrowing history, it will be much easier to get approved. But if you have bad credit because of a recent bankruptcy, foreclosure, or frequently missed payments, you may not be able to get a HELOC right now.

2. Lower your LTV

A lower loan-to-value ratio (LTV) can make it easier to qualify for a HELOC with bad credit. The less you’re borrowing compared to your home’s value, the less risky your loan is for lenders.

You can lower your LTV by opting for a smaller loan amount or waiting to take out a HELOC until you’ve built more equity. Remember that you accrue home equity as your home’s value increases and as you pay down your existing mortgage loan.

“The more equity you can build, the more attractive you will be considered as a candidate for HELOC, and you can expect better terms as well,” says Sal Dimiceli, owner of Lake Geneva Area Realty.

3. Consider a cosigner

You could also ask a friend or family member to cosign your HELOC if they have good credit and a clean financial history. “When you have a cosigner, they will be liable for your payments if you miss any,” explains Dimiceli. This “can make the lender feel safer to trust you with the loan” and makes it easier for you to qualify.

However, it’s also a big risk your cosigner is taking on. So don’t go this route unless you’re absolutely sure you can pay your second mortgage on time and in full. You want to be certain that the person consigning your loan won’t end up having to make payments or see their credit damaged.

Interest rates for a HELOC with bad credit

If you find a lender willing to approve your HELOC despite a bad credit score, “you will likely be required to pay a much higher interest rate than a borrower with good credit,” says Solomon.

For example, at the time of this writing, borrowers with good credit scores above 700 were seeing initial HELOC rates around 6.25%, according to Solomon. However, borrowers with poor credit were being quoted rates closer to 11% or more, depending on their credit histories.

Keep in mind that HELOC rates are variable. The initial interest rate will start adjusting after its fixed period ends, which means your payment could increase significantly later on.

Credit score versus credit history

“Bad credit” can mean two different things to a mortgage lender. A bad credit score is different than a bad credit history.

Your credit score is a numerical rating of your creditworthiness based on the details provided in your credit reports. Credit scores range from 300 (worst) to 850 (best). Your credit score will increase or decrease based on your history of payments, account balances, new inquiries, and other factors.

By contrast, your credit history is made up of the information found in your three credit reports. This information includes credit accounts, payment history, balances due, overdue debt from collection agencies, and details about bankruptcies, liens, foreclosures, and judgments.

It’s easier to get approved if you have a bad credit score because you haven’t borrowed much in the past, but have an otherwise clean credit report. It’s much harder to get approved if your score is low because you’ve been an unreliable borrower.

Other requirements for a HELOC

The minimum credit score is just one requirement to get approved for a HELOC. Lenders also want to see:

  • More than 15% equity accrued in the home
  • A maximum loan-to-value ratio of 80%-85% in most cases (varies by lender)
  • A maximum debt-to-income ratio of 43% in most cases
  • A steady, two-year history of income and employment

The process to apply for a HELOC is a lot like the standard mortgage process. You’ll complete an application and turn in supporting financial documents, just like when you bought your home.

In addition, the lender will likely order a new home appraisal to determine your property’s current market value. Some lenders require an in-person appraisal for a HELOC while others allow a quicker digital appraisal. You can ask about this when you apply, as it will impact the time required to close your HELOC and receive funds.

Is it worth getting a HELOC with bad credit?

Taking out a HELOC can be worth it even with a low credit score. Compared to other options, like credit cards and personal loans, this is usually one of the cheapest ways to borrow a large amount of cash.

“A HELOC, even with a high interest rate, can be worth it if you want to make home improvements that boost the value of your property or to consolidate credit card debt, which carries way higher interest than a HELOC with bad credit,” notes Solomon.

In addition, it might not matter that you have a higher HELOC rate if you plan to pay the debt off quickly.

HELOCs often come with a draw period of around 10 years during which you can borrow up to your credit limit and make interest-only payments. This is followed by a repayment period of 10-20 years when you can no longer tap the credit line and must repay your loan balance in full.

But you don’t have to stick to your HELOC’s extended repayment schedule. Instead of making interest-only payments during the draw period, you could pay off what you borrow as you go. Or, you could make accelerated payments during the repayment period to zero out your balance sooner. Either strategy would reduce the amount of time you’re paying interest and save you money in the long run.

Alternatives to a HELOC

On the other hand, paying an exorbitantly high interest rate because you have bad credit may outweigh the benefits of getting a HELOC. In this case, consider alternative forms of financing, which may yield a lower interest rate and better terms.

“If you have bad credit and are having trouble getting HELOC, you can try a cash-out refinance of your primary mortgage loan. This type of loan has lower credit score requirements than a HELOC; you might get away with a score as low as 580,” Solomon points out.

However, Solomon also notes that a cash-out refi may not be worth it if your new interest rate is higher than your current mortgage rate.

Your next steps

Take the time to shop around among HELOC lenders and compare offers, rates, and terms carefully. Be prepared to clear extra hurdles if you have bad credit. And don’t be afraid to investigate alternative options like a cash-out refinance, reverse mortgage, or personal loan.

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Erik J. Martin
Authored By: Erik J. Martin

The Mortgage Reports contributor

Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.