Can I Get a Home Equity Line of Credit if I Have Bad Credit?

Are you currently a homeowner? If so, do you have equity built up in your home? If you do, you might be able to pull some of that equity out in order to put the liquid cash toward other expenses.

Haven’t bought your house yet? Click here to learn when it’s the best time to do so.

A home equity line of credit – or HELOC for short – can help you use the equity in your home for any expenditure. However, as helpful as a HELOC can be, are you able to qualify for this program if you have bad credit?

What is a Home Equity Line of Credit (HELOC)?

Basically, a HELOC is a revolving line of credit that is secured by your property, usually at a lower interest rate compared to a traditional line of credit. They’re great for unlocking the value of your home and come with plenty of advantages, such as the following:

• The interest rates are usually far lower than credit cards;
• There are no prepayment penalties involved;
• You can withdraw as much money as you want to (within your credit limit) anytime you need the extra money.

Minimum equity requirements are expected before a HELOC is approved. Generally speaking, a HELOC is typically only offered to borrowers if they have a minimum of 20% equity in their home, although this number may vary from one lender to the next. The reason for this is that it helps ensure that the borrower owns a decent amount of their equity to protect the lender. The higher the home equity, the better the odds of approval and the lower the interest rate will be.

The property’s value will be appraised to identify the equity value. Proof of steady income will also be assessed.

In the United States, homeowners are allowed to borrow up to 80-85% of the value of their home’s appraisal value, after subtracting the amount they have remaining on the original mortgage. You can find out how much equity you can use by calculating your “loan-to-value ratio”. This can be done by dividing the balance remaining on your primary mortgage by the real estate market value of your home as it stands currently.

If you are approved for a HELOC, you will be able to use as much or as little of your credit limit as you like, similar to a credit card, rather than the full amount being forwarded to you upfront like a traditional loan. Only the amount of money that you withdraw at any given time is charged interest, which is calculated daily.

Once you pay back the amount you withdrew, you can borrow that money again and again, as long as you do not exceed your credit limit and make your monthly payments. To repay your balance in full, you’ll have to make extra payments, which is why you will need to be disciplined enough to make these payments as necessary.

Want to know what happens if you can’t afford to make your loan payments on time? Find out here.

Can I Get a Home Equity Line of Credit With Bad Credit?

Like other types of loans, you’ll need to be approved for a HELOC. Lenders will run a credit check on homeowners to find out whether or not they are financially capable of paying back the money withdrawn from the home equity line of credit. As such, credit scores play a key role in homeowners getting approved for a HELOC, as well as the interest rate they’re given.

Read this to know what happens when a lender checks your credit.

Traditional lenders typically only want to deal with homeowners who have high credit scores, which shows that they are disciplined with money and can be trusted to pay back the funds withdrawn from a HELOC. However, lenders aren’t too keen on approving homeowners who have a bad credit score because they are more of a risk. As such, many bad credit borrowers may not be approved for a HELOC. Even if they are, they will usually be charged a much higher interest rate.

The good news is that there are many private lenders out there that specialize in offering home equity lines of credit to those with bad credit. Since private lenders are not subject to the same stringent lending guidelines that traditional banks and lenders are, they have more freedom and flexibility as far as who they lend to. As such, it is possible to get approved for a home equity line of credit with bad credit score.

Curious about how your credit score is calculated? Check out this infographic.

Final Thoughts

If your credit isn’t good, your best bet is to seek out private lenders that deal specifically with bad credit borrowers when you’re applying for a HELOC. This will increase your odds of getting approved and you start using the equity you’ve built up in your home for a variety of purposes.

With all this being said, you would still be better off taking steps to improve your credit score in order to make it much easier to get approved for a HELOC in the near future. That way you’ll boost your odds of approval and get a lower rate, making the HELOC more affordable.