As a mindful homeowner, you may have spent years paying down your mortgage and building some good equity, only to discover it difficult to borrow anything against that equity due to a low credit score.
So, can you get a HELOC loan with bad credit? Yes, it’s possible, but you should expect a slightly more complex qualification process, as well as an individual interest rate, credit limit, fees, and other loan terms.
Besides credit score, many other factors shape the HELOC lender’s decision to approve your equity-backed loan. But let’s start from the top.
What’s Exactly a “Bad Score” for HELOC?
There’s no one-size-fits-all credit-score cutoff that sets the “bad credit” bar for HELOC lenders, but there are available market averages.
Generally, the credit score below 600 is considered poor, however, every other lender sets their own requirements (and potential facilitations). There are different score classifications, e.g.:
- FICO score ranges classify credit profiles as follows:
- 300-579: Very Poor/Poor credit score
- 580-669: Fair credit score
- 670-739: Good credit score
- 740-799: Very Good credit score
- 800-850: Excellent credit score
According to a full-on survey by NerdWallet, most HELOC lenders start considering deals when they’re looking at a 640 minimum credit score. Other sources say that 620 is a common average bar as well.
Note also that certain lenders may require a much higher score to work with you if your loan application lacks in other parts (e.g., taxable income, history of payments, DTI, and more).
This is why it’s crucial to reinforce the consistency, clarity, and strength of your loan application as much as you can. A finely prepared HELOC submission may as well win you over a favorable mortgage, even if you have a poor credit score.
What HELOC Lenders Evaluate Besides Credit Score
When your credit profile is less than ideal, the other parts of the loan application become even more pronounced and important.
Home Equity and CLTV
HELOC lenders will be evaluating your property’s value and its connected existing debt, using the combined loan-to-value metric, or CLTV.
Just a refresher, equity is the monetary difference between your home’s current value and the balance you owe on an existing mortgage(s). So the more of a loan you’ve paid off, the more home equity you own. And the value of the equity, i.e., of your property in general, can accumulate over time (or thanks to restorations/improvements, etc.).
Pro tip: Grow your equity “cushion” - before applying for a HELOC loan, grow your home equity over time, e.g., by reducing your mortgage principal and leveraging a seasonal property value increase.
Debt-to-Income Ratio
HELOC lenders use the DTI metric to measure your monthly debt obligations against your gross monthly income. If you have a relatively low DTI, you can build a reliable household budget for a new HELOC payment even with a poor credit score.
Your ideal target should be a ~43% to ~50% DTI or below.
Pro tip: Lower your DTI - pay down existing debts and avoid large credit-card, auto, student-loan, or mortgage payments.
Income and employment stability
A HELOC is also a debt obligation, and home equity alone isn’t enough to back up your payability. To evaluate your financial reliability, the lender may require employment and income verification (through pay stubs, tax returns, W-2s, bank statements, etc.).
Pro tip: Cut your credit use - avoid a high credit-card balance and document your income as much as you can.
Payment history
More than a “low” credit score itself, a HELOC lender may focus on the reason behind it. Thus, registered late payments, bankruptcy, foreclosure, and similar financial events won’t make your HELOC loan application easier.
If you have paid your mortgage consistently, however, and dropped in credit score only due to high revolving balances, the lender may consider your application further.
Pro tip: Maintain a clean history - thoroughly document bank deposits, business expenses, and force-majeurs (e.g., to prove that your poor score is the result of a temporary financial setback).
Property type and condition
The property itself can sway a HELOC lender’s decision because it’s used to secure the HELOC loan. The lenders will be issuing different requirements depending on:
- property type: primary residence, second home, or investment property.
- property’s appraised value
- property condition and equity value
For example, investment properties commonly fall under slightly stricter requirements due to their highly financial nature.
Pro tip: Shop for lenders - make sure to compare offers, including credit-score requirements, CLTV limits, DTI requirements, fees, and service pricing (HELOC underwriting isn’t completely standardized, so use that to your advantage).
Effects of Bad Credit on HELOC
Not universally, but a lower credit score may easily cause:
- a higher interest rate
- a smaller credit line
- lower maximum CLTV
- extra underwriting requirements
- higher fees
- or an altogether loan denial
The exact effect is everybody’s own story, of course. If you want to be extra prepared, however, you should double down on the selection of lenders and analysis of available HELOC conditions.
In particular, you can combine the above pro tips with the examination of your lender candidates’ secondary conditions, including:
- loan payments index and margin
- annual or application fees
- closing costs
- minimum payment calculation methods
- draw periods
- repayment periods
- conversion or cancellation fees
Make sure to research the HELOC-relevant info on these points.
How LBC Mortgage Can Help You
Need help understanding your own credit score? Contact LBC Mortgage to receive credit guidance and loan consultation, or go straight to personalized mortgage solutions powered by an authentic mortgage management platform.