Can You Get A HELOC With Bad Credit?
Yes, you can get a HELOC with bad credit. Most lenders prefer 620 to 680 credit scores, but approvals below that range are possible.
But the real question isn’t whether you can get a HELOC; it’s whether a HELOC will actually help you financially. Borrowers who take out a HELOC for bad credit usually have to accept trade-offs like higher interest rates, smaller credit limits and stricter minimum equity requirements.
If your credit is already stretched, those trade-offs can be hard to absorb. We’ll cover how to decide whether a bad credit HELOC is right for your situation, and what you’ll need to qualify for one.
- Yes, you can get a HELOC with bad credit, but you should expect stricter eligibility requirements and higher interest rates.
- You’ll likely need more home equity (often 15% to 25%) to qualify.
- HELOCs are best for those with flexible borrowing needs, not one-time expenses, but they can strain your budget when their interest rates begin to adjust.
Requirements for a HELOC with bad credit
| Typical HELOC requirement | What to expect with bad credit | |
|---|---|---|
| Credit score minimum | 620 to 680 (varies by lender) | If you can show that your low credit score is due to a one-time hardship, you may be able to get approved even with a low credit score. |
| DTI ratio maximum | 43% to 50% | A lower debt-to-income (DTI) ratio can give you better odds of being approved. A higher DTI may cause lenders to set higher credit score minimums or lower LTV maximums. |
| Home equity minimum | 15% to 20% (80% to 85% maximum LTV ratio) | Lenders may cap your borrowing at a lower loan-to-value (LTV) ratio, which means you’ll need more equity than borrowers with higher credit scores. |
Shopping around is a must, especially when you have bad credit. The interest rate, credit limit and terms you’re offered may differ significantly from one lender to another. This is especially true for second mortgages, and once your HELOC rate adjusts, even a small difference in your variable rate can have a big impact on your monthly payments.
How to get approved for a HELOC when you have bad credit
1. Focus on lowering your credit utilization
One of the fastest ways to improve your credit score before applying is to reduce how much of your available credit you’re using.
- Aim to keep your credit utilization below 30%, but ideally much lower.
- To truly maximize your score in the short term, completely pay down all of your open credit lines except one. Leave a very small balance (around 1% of its limit) on that last card or credit line. (This is sometimes called the “all zeros except one” strategy.)
2. Avoid new credit applications before applying
Applying for new credit can temporarily lower your score and raise red flags for lenders.
- Avoid applying for new loans or credit cards for at least 30 to 60 days before applying for your HELOC.
- Multiple recent inquiries can make you look like a higher-risk borrower.
3. Check your credit report for errors
Mistakes on your credit report can drag down your score, and they’re more common than you might think.
- Look for incorrect late payments, balances or accounts you don’t recognize.
- Disputing errors can sometimes result in a quick score improvement.
4. Build compensating strengths
If your credit score isn’t ideal, lenders will look for other signs of financial stability. You can strengthen your application by:
- Increasing your home equity. You can do this by paying down your primary mortgage balance or, if you’re not in a hurry, making home improvements that will increase your home’s value.
- Showing consistent income and employment. A steady, high income can help reassure lenders that you’re not a risky person to lend to.
- Reducing overall debt. If there are any debts you can pay down before you apply for your HELOC, do it. A lower DTI ratio can help you access better interest rates and more forgiving credit score and LTV ratio requirements.
5. Shop with multiple lenders
As we’ve covered, HELOC requirements vary widely from lender to lender — and that’s especially for borrowers with lower credit scores. Comparing loan offers gives you the best chance to find a workable option, and potentially save thousands of dollars over the life of your credit line.
You can use LendingTree to submit your financial info once and receive quotes from multiple lenders.
When a HELOC with bad credit makes sense
- You’ve built up a decent chunk of home equity. If you’ve built up a sizable ownership stake in your home, lenders may be more willing to overlook a lower credit score.
- You’re using it to consolidate high-interest debt. Using a HELOC to pay off high-interest balances — like credit cards — could lower both your monthly payments and the total interest you pay over time.
- Your income is consistent. Reliable, predictable earnings make it more likely you’ll be able to keep up with your HELOC payments. That’s extremely important when your home is serving as the collateral.
- Your finances are in better shape now. If your credit score dropped because of a one-time event — for example, you lost your job but have landed safely in a new one — you may be in a better position to qualify now. Lenders look at your whole situation, not just your score.
When a HELOC is risky (especially with bad credit)
- You’re too focused on the initial payment amount. HELOC rates fluctuate, so while the initial payments may look appealing, it’s very likely they’ll rise once the rate starts adjusting.
- You’re consolidating debt without behavior change. If you use a new loan to consolidate debt without really understanding why you got into debt in the first place, you’re likely to repeat the cycle again — only this time you’ll be racking up new debt while already juggling two mortgage payments.
- You’re near your financial limit. If rates rise or your income changes, the added HELOC debt can quickly turn into a big financial strain, especially if you’re already on a tight budget.
- You plan to carry a large balance long-term. Many people who take out a HELOC have plans to pay off the balance or refinance before the draw period ends. If you expect to carry a large balance for years, a fixed-rate option like a home equity loan may offer more predictability and lower overall risk.
Mistake 1: “It’s cheaper than a personal loan.”
While HELOCs are generally a cheaper way to borrow money than personal loans, the interest rate you’re quoted when you apply for a HELOC only represents what you’ll pay at the beginning of your loan term. Once the interest rate begins to adjust, your payments could shoot up and the total interest you’ll pay over the life of the loan will follow suit.
Mistake 2: “I’ll just borrow what I need.”
Because you can borrow repeatedly during the draw period, it’s easy to build up a large balance over time rather than pay it down. Take a realistic look at your ability to stick to a budget before assuming that you can limit yourself once you have a HELOC.
Mistake 3: “My payment will stay low.”
HELOC payments may be interest-only during the draw period, which allows you to enjoy artificially low monthly payments. When a HELOC rate begins to adjust, payments can more than double once the draw period ends and you’re required to repay both principal and interest each month.
Alternatives to a HELOC with bad credit
If a HELOC isn’t the right fit, you may want to consider:
- Home equity loans, which come with more stable payments.
- Personal loans, which don’t require you to put your house at risk and offer options tailored to borrowers with bad credit.
- Debt consolidation loans, which can help you consolidate debt with fixed payments and no collateral requirements.
- Using a credit monitoring service like LendingTree Spring to help you improve your credit score.
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