If you’re a homeowner and have a credit score with a few dings and scratches, you might think a home equity line of credit (HELOC) is out of reach. The truth? Maybe not. While less-than-stellar credit can make the process more difficult, closing on a bad credit HELOC might be simpler than you think.
To understand the paths forward, it helps to step inside the HELOC approval process to see what lenders look for and how to position yourself in the best light. We’ll break down the process, pros and cons of a HELOC for bad credit, and some financial alternatives if qualifying becomes tricky.
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A HELOC is a second mortgage that lets you borrow against the equity you’ve built in your home. The easiest way to think about it is that it’s essentially a credit card where your home secures the credit line.
Instead of receiving a lump sum of money like you would if you took out a home equity loan, a HELOC gives you a revolving credit line you can draw from as needed — up to your credit limit — during the draw period, which usually lasts up to 10 years. After that, HELOCs enter a repayment phase when you’ll need to repay what you’ve drawn, plus interest, over a period of time.
A major advantage of HELOCs, like credit cards, is that you only pay interest on what you borrow. This feature makes them flexible financial tools for major expenses like making home improvements, consolidating higher-interest debt, or even repaying unexpected bills.
However, before taking out an HELOC, it’s important to understand the risks involved. Since your home secures your credit line, defaulting on your HELOC could have disastrous consequences, including the potential to lose your home.
The short answer here is yes — getting a HELOC with bad credit is possible. However, getting a HELOC when your credit has some blemishes may not be as straightforward as for someone with good credit.
Most HELOC lenders typically want borrowers to have a minimum credit score of 680 with a debt-to-income ratio (DTI) of no more than 43%. Before you start sweating, these are averages, not hard-and-fast rules. Some lenders, especially nontraditional ones, may have more lenient qualification criteria and look at more than just your credit score.
Your credit score isn’t the only thing lenders care about. Lenders want to know that, should they lend to you, they’re taking on as little risk as possible. These factors all work together to build a complete financial profile for a lender to consider when working with borrowers with lower credit scores seeking HELOCs.
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Home equity. The more equity you have, the better. Most lenders require you to have at least 15% to 20% equity in your home, but having more may offset credit issues.
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DTI ratio. Lenders want to know you’re not overextended. A DTI ratio under 43% is usually preferred, though some lenders have higher limits.
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Income stability. A reliable, verifiable income — whether from full-time work, self-employment, or retirement benefits — can work in your favor.
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Payment history. A record of consistent, on-time payments, especially for your mortgage and other major debts, can work in your favor.
When you find a lender willing to work with your entire financial picture, preparing for a few trade-offs is important. The most important one? You’ll likely face a higher HELOC interest rate than borrowers with top-notch credit.
Learn more: 7 ways to build equity in your home
If you’re still thinking that a HELOC is the right tool for your financial goals, taking a few proactive steps can help pave the way for application success.
Check and improve your credit
First things first: Know your credit score and understand what’s dragging it down. Dispute any errors and focus on paying down existing debts. Even a modest score bump can make a big difference.
Not all HELOC lenders are created equal. Some credit unions, local banks, or online lenders may specialize in working with borrowers with credit challenges. Compare offers and read the fine print.
If you have a friend or family member with strong credit, their support as a co-signer on your second mortgage could tip the scales in your favor. Just know that they’ll be on the hook if you default.
The more of your home you own outright, the lower the risk for the lender. If you’re close to reaching a higher equity threshold, consider waiting to apply.
Gather proof of income, employment, and any assets. The more you can demonstrate financial stability, the more confidence a lender will have, even if your score is low.
If your debt load is high, prioritize paying down balances before applying. Lenders see a low DTI ratio as a sign that you can handle new payments.
Sometimes, life happens. Medical emergencies, job loss, or divorce can all hurt your credit. Be honest and proactive. A personal letter explaining your situation might resonate with a lender on the fence.
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Access to funds. HELOCs offer on-demand access to money when you need it most.
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Lower interest rates than credit cards. Even HELOCs for homeowners with bad credit may offer lower interest rates than credit cards, since your home secures the debt.
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Interest-only payments. You typically only need to make interest-only payments during the draw period, making monthly payments more manageable.
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Potential tax benefits. If you use your HELOC to make substantial home improvements, the interest paid may score a tax deduction (check with your tax professional).
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Higher interest rates than those with excellent credit. While it’s not ideal, the unfortunate reality is that bad credit generally means higher borrowing costs.
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Foreclosure risk. If you can’t make the required payments, you could risk losing your home in foreclosure if your HELOC defaults.
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Variable interest rates. Most lines of credit have adjustable rates. If interest rates rise, your HELOC payments could increase — adding to any existing financial stress.
If a HELOC for bad credit isn’t in the cards right now, you still have lending alternatives that could offer the funds you need. As you weigh the options, it’s important to consider the risks and rewards of each and how the new financial obligation could stress your monthly finances.
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Home equity loans. Home equity loans provide fixed payments and interest rates, and they’re useful if you need a lump sum of money all at once. They’re not necessarily easier to qualify for than HELOCs, though.
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Cash-out refinance. If today’s rates are lower than when you took out your mortgage, a cash-out refi could give you access to money — and at a lower rate than a HELOC. The catch is that a cash-out refinance replaces your current mortgage with an entirely new loan. So, if you have a super-low mortgage rate, you could lose it by opting for a cash-out refinance.
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Personal loans. A personal loan could get you the cash you need, though you’ll likely find higher interest rates than you might on HELOCs.
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Credit counseling. Improving your overall financial profile through credit counseling could help you reestablish control of your finances and secure lower rates in the future.
Dig deeper: How to choose between a HELOC and a home equity line of credit
To get a HELOC, most lenders want to see a credit score of at least 620 to 660. While some lenders may have lower score requirements, you’ll typically need a higher percentage of home equity, a lower debt-to-income (DTI) ratio, and a rock-solid income and employment history to make up the difference.
You may be disqualified from getting a HELOC loan if a lender views you as a significant credit risk. A poor credit score, low amount of equity in your home, high DTI ratio, and unstable income and employment history could all leave your application in the “denied” pile.
HELOCs aren’t necessarily hard to get approved for, but you’ll need to focus on making a strong case for lenders. This includes a good credit history, at least 20% equity in your home, a DTI ratio of around 43%, and a stable monthly income and employment history.
Laura Grace Tarpley edited this article.
