Borrowers with credit scores below 680 may have a more difficult time qualifying for a HELOC. It's important to note that lenders also consider a borrower's credit history in addition to their score. A history of late payments or negative credit events can make it harder for borrowers to qualify for a HELOC.
These credit lines gained popularity in the 1980s due to high home appreciation and tax reform initiatives, but the Great Recession and housing crisis of the mid-2000s caused HELOCs to no longer be offered by big banks because home equity was difficult to determine.
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.
A home equity loan and HELOC are two ways you can tap into the equity of your home. To qualify for either loan with reasonable terms, you should have at least 15% to 20% equity in your home, a LTV ratio of 80% or lower, a credit score of at least 620 (the higher, the better) and a DTI ratio no higher than 43%.
Lenders typically look at your home equity, your loan-to-value ratio, your debt-to-income ratio, and your credit score before they decide if you qualify for a home equity line of credit. These numbers can also affect the interest rate they might offer you on a HELOC.
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.
Generally, you'll need a FICO® Score☉ of at least 680 to qualify for a home equity loan. If your credit score is below 680, however, all is not lost. You may still be able to get a home equity loan with bad credit, but you should be aware of the downsides first.
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.
That said, it may not be impossible to get approved for a HELOC with this type of credit score. While a 580 credit score is lower than what's typically required, there are lenders open to borrowers with credit challenges and some non-traditional lenders specialize in working with borrowers who have lower credit scores.
In the wake of the Fed's recent cuts this year, a HELOC may be more beneficial than a home equity loan because the rate could drop more dramatically. Also, with a HELOC, you can draw funds as you need them, and you only have to pay interest on the funds you actually take out.
Early in the pandemic, several big banks stopped offering HELOCs, citing unpredictable market conditions. Demand for these loans is low, but a few big banks have started offering them again. Plenty of lenders still offer both products, though, so you shouldn't have trouble getting either.
The Bottom Line. You can get a HELOC almost anywhere mortgages and other loans are offered. For the best deal, look for a competitive interest rate with no fees, no prepayment penalties, and no minimum balance requirement.
Lenders will want you to have a debt-to-income ratio of 43% to 50% at most, although some will require this to be even lower. To find your debt-to-income ratio, add up all your monthly debt payments and other financial obligations, including your mortgage, loans and leases, as well as any child support or alimony.
HELOCs only charge interest on the amount that's been used. For example, if you use $15,000 out of a $50,000 line of credit, you will only pay interest on the $15,000. You won't have to make monthly payments. If you don't use your HELOC you won't have monthly payments unless the lender charges a monthly inactivity fee.
Home equity lines of credit (HELOCs) generally have variable interest rates, which can eventually lead to higher monthly payments. HELOC borrowers who initially make interest-only payments face dramatically higher monthly payments once the interest-only period expires.
Debt-to-Income Ratio
Your potential lender will look at your regular income in comparison to your existing debt. If your debt outweighs your monthly income, then you'll have problems qualifying for a home equity loan. While you may qualify, you may not qualify for the amount that you prefer.
A home equity line of credit or HELOC is another type of second mortgage loan. Like a home equity loan, it's secured by the property, but there are some differences in how the two work. A HELOC is a line of credit that you can draw against as needed for a set period of time, typically up to 10 years.
With a home equity loan, you receive the money you are borrowing in a lump sum payment, and you may have a fixed or adjustable interest rate. With a Home Equity Line of Credit (HELOC), you can borrow or draw money multiple times from an available maximum amount.
Most lenders require you to have at least 15% to 20% equity left in your home after factoring in the new loan amount. If your home's value has not appreciated enough or you haven't paid down a big enough chunk of your mortgage balance, you may not qualify for a loan due to inadequate equity levels.
HELOC payment examples
For example, payments on a $100,000 HELOC with a 6% annual percentage rate (APR) may cost around $500 a month during a 10-year draw period when only interest payments are required. That jumps to approximately $1,110 a month when the 10-year repayment period begins.
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. Lenders require an appraisal for home equity loans to protect themselves from the risk of default.
While qualifying for a HELOC depends more on your home equity than your credit score, good or excellent credit can simplify the process and make it a lot easier to qualify for a HELOC. A good average to shoot for is 645 or higher. Plus, the better your credit score, the better your interest rate.
The average HELOC interest rate is currently 9.16%. If you took out a HELOC, and your interest rate remained the same for the life of the credit line (with a 15-year repayment period), you would pay $307.14 per month.
You can pay off your HELOC early, but be mindful of pre-payment fees, if any. If you have a Citizens HELOC, you're in luck as Citizens does not charge pre-payment fees. HELOCs allow you to make interest-only payments during the draw period, then transition to principal and interest payments during the repayment period.