Depending on which situation applies, lenders cannot issue them a home equity loan until they either earn additional equity in their home or pay off some of their existing debts. Another common issue you might run into is having a credit score or payment history not meeting a lender's requirement.
Credit score: At least 620
In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a home equity loan with bad credit.
You generally need credit scores of 620 or above to get a home equity loan. But getting approved with higher credit scores can be easier than with lower scores, and having good credit could also lower your interest rate.
Getting approved for a HELOC with a 580 credit score is generally difficult. Most traditional lenders require a minimum credit score of 620 to 660 to qualify, with some requiring scores of 680 or higher.
Home buyers with a credit score at or above 580 can borrow up to 96.5% of a home's value. While borrowers with credit scores of 500 – 579 may still qualify for an FHA loan with a 10% down payment, many lenders have their own minimum credit score requirements.
It's possible to get a home equity loan with a fair credit score — as low as 620 — as long as other requirements around debt, equity and income are met.
A $50,000 home equity loan comes with payments between $489 and $620 per month now for qualified borrowers. However, there is an emphasis on qualified borrowers. If you don't have a good credit score and clean credit history you won't be offered the best rates and terms.
Does a home equity loan require an appraisal? Yes. This is the case for home equity related financial products such as fixed rate home equity loans, home equity lines of credit (HELOCs), and cash out refinances.
Before you start counting the coins in your housing piggy bank, though, a reality check: Getting approved for a HELOC or home equity loan isn't easy. Roughly half of the applications get rejected — far more than the rate of primary mortgage denials.
Typically, lenders require a DTI of 43% or lower. To calculate your DTI, add up your monthly expenses, including your mortgage payment, student loan payments, regular bills, child support, and other debt, and then divide that by your monthly income.
HELOC or GELOC minimum monthly payments are determined by the HELOC or GELOC interest rate. HELOCs or GELOCs that closed at an interest rate of 8.0% or lower: Minimum monthly payment is 1% of the member's unpaid principal balance.
To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow 15 percent. You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
Higher Interest Rates:
In general, home equity loans often come with higher interest rates compared to primary mortgages or other types of secured loans. One reason for this is that home equity loans are often in the second lien position, meaning they are subordinate to the primary mortgage.
Get an FHA Loan to Buy or Refinance a Home. The FHA loan program can help you buy or refinance a house even if you have a bad credit score. FHA home loans are backed by the Federal Housing Administration, which allows lenders like Freedom Mortgage to offer loans to customers who may have lower credit scores.
Qualifying credit score: You will need to meet your lender's minimum credit score requirements. For example, Discover Home Loans requires a credit score of 680 or above to qualify for a home equity loan. The higher your credit score is, the more likely you will be approved for lower interest rates on your loan.
The amount you can borrow is based on your income, credit history, the equity you've accumulated, and your home's current value. When you apply for a loan, it usually takes between two weeks and two months to close the loan and get your cash.
Some mortgage products eliminate the need for an appraisal. These are called no-appraisal mortgages or no-appraisal loans. In some cases, no-appraisal mortgage programs may be offered to homeowners who don't qualify for conventional refinancing from banks or direct mortgage lenders by different agencies.
Most home equity loans are going to require an appraisal to get approved. Many lenders, including Rocket Mortgage, require a full appraisal to determine the appropriate home value. There are other options, but they are less commonly used and typically have higher borrowing rates.
Here, then, is what a $10,000 home equity loan would cost now that rates have been reduced, tied to two common repayment periods and the rates those periods come with: 10-year home equity loan at 8.50%: $123.99 per month. 15-year home equity loan at 8.42%: $98.01 per month.
To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
Credit Score Requirements for HELOCs
According to Experian, borrowers likely need a FICO Score of at least 680 to qualify for a HELOC, but some lenders may prefer a credit score of 720 or more.
The average FICO credit score in 2024 is 717 and the average VantageScore is 702. However, average credit scores vary widely based on a number of factors, including age, income, immigration status, health, and race. Average credit scores also vary significantly based on location.
What is the monthly payment on a $50,000 HELOC? Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.