A home equity line of credit is a loan that can be borrowed by a homeowner, where the borrower requests financial assistance by relying on the real estate they own. The amount of the loan will be equal to the current equity in the home.
As a home equity line of credit is known, a HELOC can help cover major expenses such as home remodeling, improvements, and educational expenses.
You may wonder if getting approved for a HELOC is possible if your credit isn’t high. It’s not impossible, so here’s everything you need to know.
What is a bad credit score?
When you apply for your HELOC, lenders will look at your credit score, which will determine their decision to accept or deny your application.
The credit score is the 3-digit number representing the borrower’s creditworthiness; it is of utmost importance to lenders because these three digits reflect the possibility that the borrowed money will be paid back or repaid.
To the lenders, having a bad credit score means that they will not receive the money for the loan purchased; therefore, if you do not have a good score, it is very likely that they will decide not to be part of the HELOC agreement.
These scores are based on the borrowers’ credit payment history collected by different entities that have lent credit, i.e. credit bureaus.
There is a point scale, which represents whether you have a good or bad credit score. A good score ranges from 850 points to 780 points. On the other hand, a bad credit score ranges from 300 to 600 credit points.
Can I have a HELOC with bad credit?
While it is true that the score is an important factor in being accepted into the HELOC, not all lenders share the same requirements or standards when providing mortgage-backed loans.
The key is researching and comparing lenders’ terms and conditions to find what best suits you.
Regardless of the lender, it would be best if you started collecting some of the most common requirements when processing a home equity line of credit; these requirements are:
On-time bill payment history. Within bills are included tax payments, stable employment history along with monthly income, the figure of between 15% to 20% of your home equity, and your credit score.
Finding lenders that offer home equity loans with bad credit
Before you agree to a loan, it’s important to know that the lender who agrees to give you the HELOC loan will most likely consider charging a higher interest rate because of your bad credit status.
It is not impossible to find lenders willing to work with customers with a low credit score, but they will be much more thorough in the arrangement.
Another requirement the lender may impose is strictness in the monthly loan payments; remember that the insurance on the loan is your home, and the lender may include in the agreement that if you do not pay the interest on time, you may lose your home.
Two types of lenders typically agree to offer HELOCs to borrowers with low credit scores: local banks and credit unions; and online lenders.
Local banks and credit unions
Community banks are usually more flexible than large banks in presenting their requirements. If you are already a regular customer of the bank, they will take you into better consideration.
Since they are not as well-known or prominent banks, they need to position themselves in the financial market, and competing in the lending business is a viable option. Therefore, they will be willing to accept riskier loans that established banks would not.
An online lender does not have the same overhead that a traditional bank might have; their expenses are considerably lower. Because of this, they can pass the savings for the loan on to the customer without potentially generating a loss for the customer.
Typically, online lenders charge lower interest and fees on loans than traditional banks.
Another reason online lenders are a viable option is that it is easy to get a quote online without going through a rigorous credit history check and without so much organizational paperwork.
An internet lender will offer several different offers depending on the need and the credit data the customer provides. There are millions to compare your options and choose the best one.
What minimum score credit do I need for a home equity loan?
The minimum credit score you need to apply for a home equity line of credit will vary from bank to bank or lender to lender.
The average asks for a minimum credit score of 620, while others ask for a minimum of 730. The more well-known or established in the marketplace the bank is, the higher the minimum required figure will be.
Now, if you have a lower score, don’t give up, lenders have several requirements that go hand in hand with the credit score, so it is possible to qualify, even if you don’t reach the minimum required as long as the other requirements are met.
Are there other alternatives?
If your HELOC is denied, you can look for other options that fit your financial situation, rebuild your credit score, and then reapply.
The first thing to do is to look for the root of the problem with your credit score. To complete this, you should review your spending habits, credit history, tax payments, and even interest payments on other debts. It is also recommended to establish an emergency fund.
Another step that can help you rebuild your credit score is to seek credit counseling to find guidance that will help you improve your score and your overall financial situation.