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Can You Get a HELOC with Bad Credit?

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated February 13, 2024​

8 min. read​

Each monthly mortgage payment builds up your home equity. You can tap into this home equity through a home equity line of credit. These lines of credit tend to have lower interest rates since they are tied to collateral.

However, banks, credit unions, and online lenders will often check your credit score before giving you the extra capital. Many of these creditors have minimum credit score requirements. Some people don’t have the best credit scores, but it’s still possible to get a HELOC if you have bad credit.

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What is Considered Bad Credit?

FICO uses several categories to determine the quality of a consumer’s credit score. Bad credit consists of numbers below 580 and can be viewed as credit risks for financial institutions.

Causes of Bad Credit

The credit scoring system measures a consumer’s history of paying off debt and managing multiple loans. While there are several nuances that can impact your credit score, payment history is the most significant component of your score.

Late payments will hurt a consumer’s credit score. Those late payments will also increase the balance on a consumer’s credit card due to interest and fees. A higher balance will increase your credit utilization ratio, a component that makes up 30% of your credit score.

It’s okay to have a credit utilization ratio under 30%. However, banks may get nervous about a consumer’s ability to cover debt if that person has a credit utilization ratio above 30%. A consumer with a $1,000 credit card limit and a $300 balance has a 30% credit utilization ratio. Paying off the debt will reduce your balance and your utilization ratio, resulting in a better credit score.

Most of your credit score boils down to your payment history and credit utilization ratio. Other notable factors include the age of your credit, any hard inquiries, and your credit mix. Older credit will improve your score, and it’s even better if you have multiple types of debt as long as you can pay them off.

Consequences of Bad Credit

A bad credit score can have several consequences on your finances and the types of decisions you can make. Consumers with bad credit will have a more difficult time getting loans. Not every lender wants to take a chance on a consumer with a history of falling behind on payments. The lenders that work with consumers who have bad credit will have higher interest rates.

A bad credit score can limit your choices for a neighborhood, as a higher interest rate will result in a higher monthly mortgage payment. Consumers have to assess their budgets, and a bad credit score will put some pressure on the margins. Bad credit can also impact your tenant applications since landlords check your credit score during the tenant screening process.

If you need to raise capital to start a business, you will have to contend with higher interest rates. Bad credit can also result in higher insurance premiums and utility bills. Your creditors will expect more money from consumers with bad credit because they want to minimize their risk.

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Can You Get a HELOC with Bad Credit?

It is possible to get a HELOC with bad credit. Some lenders have more generous requirements, especially if you expand your search to online lenders. However, consumers with bad credit will have a smaller pool of lenders to choose from, and the interest rates will be higher.

It is a good idea to improve your credit score before getting a HELOC. However, if time isn’t on your side, you can compare lenders to see which one offers the best rate and terms.

What Bad Credit Means When Getting a HELOC

A bad credit score will make it more difficult, but not impossible, to get a HELOC. You may have to reach out to more lenders and have more expenses associated with the line of credit that you receive.

However, a HELOC can give you the opportunity to rebuild your credit. Making on-time payments toward this line of credit can improve your credit score and help you qualify for a lower interest rate in the future. You should make at least the minimum monthly payment, but it is a good idea to pay more than the minimum if you have the extra cash.

When you are getting a HELOC with bad credit, you will have to contend with the disadvantages of a low score. However, it’s possible to build your score over time and use the HELOC as an opportunity to get extra points in the long run.

The Possible Consequences of Getting a HELOC with Bad Credit

While a HELOC lets you access extra capital that you can use for any purchase, it comes with risks if you have a bad credit score. These are some of the possible consequences to keep in mind.

Higher Interest Rates

Creditors will charge higher interest rates if you have a bad credit score. A higher rate will result in your balance growing at a faster pace. While it’s good to get immediate capital, it is important to consider how the elevated interest rates will impact your ability to make the minimum monthly payments.

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Additional Fees

Some fees, such as origination fees, may be higher if you do not have the best credit score. While certain fees, like late fees, may stay the same, you can end up with more frequent fees if you do not make on-time payments. You should check a HELOC’s terms and conditions to see the fees.

Risk of Foreclosure

A secured debt like a home equity line of credit will have a lower interest rate than an unsecured debt like a credit card. However, you can risk losing your home if you fall behind on HELOC payments for too long.

Home equity lines of credit present the same risks as mortgages. Falling behind can quickly damage your credit score and possibly result in a foreclosure. Homeowners can mitigate this risk by taking out less home equity. Not every homeowner has to borrow equity equal to their maximum limits. Some homeowners may have to contend with monthly mortgage payments and HELOC payments.

Common Challenges of Getting a HELOC with Bad Credit

It’s possible to get a HELOC even if you do not have the best credit score. However, these are some of the common challenges you should expect along the journey.

Restricted Options

Fewer lenders work with consumers who have bad credit scores. Some financial institutions require that you have a 680 credit score or higher, while others have a 620 minimum credit score requirement.

Consumers with 580 credit scores or lower will have to pursue other choices. It’s possible to find lenders who will give you a home equity line of credit, but you will have to do some more digging.

Limited Lenders Willing to Offer a HELOC to Those with Bad Credit

It’s risky for lenders to offer loans to consumers with bad credit scores. Getting capital can become an uphill battle if you do not improve your credit score first.

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The Importance of Shopping Around for Interest Rates

Shopping around for rates is a critical part of the HELOC process. Finding lower rates and better terms can help you save hundreds or even thousands of dollars from your HELOC. A single percentage point of APY on a $100,000 balance represents an additional $1,000 in annual expenses.

Shopping around can be more difficult since consumers with bad credit will have fewer choices. Even with fewer choices, consumers with bad credit scores should still seek multiple quotes instead of going with the first offer they find.

Understanding Terms and Conditions

Any homeowner should look at the terms and conditions of their HELOC, regardless of their credit score. These guidelines cover what happens if you do not pay on time when fees accumulate, when the draw period concludes, and other essential details.

How to Prepare for a HELOC Application with Bad Credit

It’s possible to get a home equity line of credit even if you have bad credit. You can follow these steps to be more prepared for submitting your HELOC application.

1. Check Credit Score Requirements for HELOC

Checking the credit score requirements before submitting a HELOC can save you time. You don’t want to spend an hour working on an application and researching a lender if the minimum credit score is higher than your FICO score.

You shouldn’t apply for a HELOC just for the sake of it if you do not fulfill the minimum credit score requirement. HELOC applications trigger hard credit checks, which will have a negative impact on your credit score. These credit checks only reduce your score by a few points, but they can add up.

You can submit multiple applications within 14 days and have all of them treated as a single hard credit check. However, it is not a good idea to start the 14-day countdown with a lender that has a high minimum FICO score requirement.

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2. Gather Necessary Documents and Information

Lenders will request several documents to verify your identity and income. You will have to present a valid photo ID and information about your income. Income documents can include pay stubs, tax returns, bank statements, and other resources. You will also have to provide your address and contact information.

3. Address Potential Roadblocks During Application

Many consumers aim to improve their credit scores before submitting applications to increase their odds of getting approved. However, that’s not the only thing you can do to get a HELOC. Consumers should also prioritize their debt-to-income ratios. This ratio compares your monthly debt payments with your monthly income. If you earn $5,000 per month and pay $2,000 per month for loans and other debt, you have a 40% debt-to-income ratio.

A 40% debt-to-income ratio is usually sufficient to get a HELOC, but the requirement depends on the lender. You may be able to get a line of credit if you have a debt-to-income ratio of 50%, but it becomes more difficult and usually comes with higher rates.

You can only improve your debt-to-income ratio by earning more income or by paying off your debt without accumulating additional debt. Picking up a side hustle can make it easier to get a home equity line of credit since it will reduce your debt-to-income ratio. The lower your debt-to-income ratio is, the better it is for your chances of getting a HELOC.

4. Weigh the Pros and Cons with Alternatives

A home equity line of credit isn’t the only way you can tap into the equity you have built up in your home. You can also consider a home equity loan or a home equity sharing agreement. Both of these arrangements have pros and cons, just like home equity lines of credit.

A home equity loan is similar to a HELOC. Instead of having a draw period, you make fixed monthly payments on a home equity loan. These payments are higher than the minimum monthly payments for a HELOC, but you are likely to get out of debt sooner. Home equity loans often have fixed interest rates, which differs from HELOCs, which usually have variable interest rates.

A home equity sharing agreement is a different entity that can offer the most immediate help for people with tight budgets. You get to tap into your home’s equity without going into debt or dealing with monthly payments. However, you will have to give the creditor a percentage of your home’s equity. If the creditor has a percentage of your home equity, then that company’s stake will become more expensive as your home gains value.

A home equity sharing agreement is optimal for people who can’t afford the payments for a HELOC or a home equity loan. It may also be a good idea if you don’t intend on giving your house to any heirs. However, you will receive less money when you sell your house if a home equity-sharing company has a percentage of your total equity. You can buy it back, but the share will get more expensive if your property’s value goes up.

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5. Improve Your Chances of Approval

A higher credit score, extra income, and a lower debt-to-income ratio will all improve your chances of getting approved. Lenders list their requirements, and you can see how close you are to each benchmark. Improving your financial profile for one lender will make getting a HELOC from another creditor easier if the first offer falls through.

Conclusion: How to Get a HELOC with Bad Credit

A home equity line of credit can give you the extra money to make home repairs, go on a vacation, address necessary expenses, or cover any purchase. While it’s easier to get a HELOC with a good credit score, there are choices available for people who have bad credit.

It is still possible to find lenders who will offer a HELOC, but you may have to contend with a higher interest rate. Working on your credit score during this entire process can help you make better choices. Picking up a side hustle can make it easier to stay on top of bills and will improve your debt-to-income ratio.

While a HELOC may not have the best terms if you have a bad credit score, you can use this opportunity to build up your credit. Creditors will report your HELOC payment history to the major credit bureaus. Making your minimum monthly payments on time can help you qualify for better financing in the future.

Need Some Funds Now? Get a Mortgage Refinance Instead

If you’re looking for a way to access funds quickly and have less-than-perfect credit, consider a mortgage refinance with CrossCountry Mortgage. By refinancing your existing mortgage, you have the opportunity to tap into the equity in your home and secure a cash-out refinance. Plus, with a CrossCountry Mortgage cash-out refinance, you only need a 620 credit score for conventional loans and an even lower 500 score for FHA loans.

CrossCountry Mortgage offers flexible refinancing options that allow you to use the cash for various purposes, such as home renovations, paying off high-interest debt, or funding significant expenses. Their team of experts will work with you to determine the best refinancing solution that aligns with your financial goals and helps you access the funds you need.

To start the process, fill out their online form. A member of their team will reach out to you with no obligation to discuss your options and provide personalized guidance. Don’t miss out on an opportunity to leverage the equity in your home for your financial needs. Contact CrossCountry Mortgage today and explore the benefits of a mortgage refinance.

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