A Guide To Getting A HELOC With Bad Credit

If you have enough equity built up in your home, tapping into your home value can be an attractive prospect for making home improvements or accomplishing other financial and lifestyle goals. If you’ve struggled with finances in the past, your history may discourage you in the attempt. But it’s not a permanent black mark. You can work toward a home equity line of credit (HELOC) with bad credit by making steady progress.

Although Rocket Mortgage^® doesn’t offer HELOCs at this time, some of the tips offered here may give you a leg up when working to qualify for these or any other funding option.

Can You Get A Home Equity Line of Credit With Bad Credit?

“Bad” is a subjective judgment. Lenders believe more in empirical data. Here are the credit score ranges provided by the Fair Isaac Corporation, standards used by most financial institutions:

You’ll likely need at least fair credit to apply for a HELOC. In fact, just 4.6% of HELOCs issued were for clients with subprime credit scores. In the December 2024 data from Equifax™, this was considered any score below 620. This represented 2.3% of the total outstanding credit limit on HELOCs. While lower scores represent a small percentage, it’s possible.

What Is The Lowest Credit Score You Can Have?

There’s no specific HELOC for bad credit. Every lender has different standards. While some will let you qualify with a credit score of 620, you may find you have more options in the marketplace if your score is 680 or better.

What Factors Can Disqualify You for A HELOC?

Before we get into everything you need to know to qualify, it’s a good idea to understand both the red flags that lenders look for and ways to know a HELOC may not be right for you:

• Your credit score is too low. Although you can sometimes be approved with a score on the lower side, you generally want a score of 680 or better to give yourself more options.
• You have negative events on your credit report. Some items being on your credit, like a bankruptcy or foreclosure, are usually associated with a waiting period before you can be approved.
• Low equity makes it impractical. When you have a HELOC, lenders require that you retain a minimum amount of equity in the house. This could be as much as 35% – 40%, so you have to make sure that the equity you can access is enough to accomplish your goals.

Is It A Good Idea To Get A HELOC If You Have Bad Credit?

Lower credit scores typically result in higher interest rates that can translate to thousands of extra dollars paid over the life of the loan, depending on the term. For this reason, it can be better to steadily work on your credit before applying.

If you need immediate financing despite bad credit, consider alternatives such as personal loans or credit cards. These options may be safer, as they don’t require using your home as collateral, though they typically come with higher interest rates.

How To Get A HELOC With Bad Credit

If you want to get a HELOC with bad credit, use the steps below as a guide.

Check Your Credit

Start by checking your credit to determine where you stand. Depending on your situation, you might be pleasantly surprised by your credit score. Or you might realize that your credit score is lower than you anticipated. If that’s the case, you can take steps to work on it

Regardless of the number, it’s important to understand where you’re starting from.

Improve Your Credit

You could despair about your credit, but it’s better to take action to improve it:

• Dispute inaccuracies on your credit report. Mistaken information on your credit report can often drag down your score. Make sure you dispute any incorrect information. If you see loans and credit cards that you don’t recognize, you could also be the victim of identity theft. You should only be responsible for the things you actually did.
• Commit to on-time payments. Your payment history accounts for 35% of your FICO score. Making your payments on time has the highest possible impact on your credit score.
• Pay down revolving debt. If you have large amounts of credit card debt, make a plan to pay it off ahead of schedule. Lowering your credit card debt balance impacts your credit utilization rate, which can help improve your credit score. After credit cards, prioritize the debts with the biggest monthly payments to lower your debt-to-income ratio (DTI).

While improving your credit score takes time, it’s worth the effort. An improved credit score can help you tap into lower interest rates on a HELOC, which could save you thousands.

Determine How Much You Can Borrow

How much you can borrow in a HELOC is dependent on both the amount of existing equity you have and your current mortgage balance, if any. Many lenders only let you borrow 60% – 65% of your home value, including your primary mortgage. Run the numbers to see if this makes sense for you.

For example, let’s say your home is worth $600,000, and your current mortgage balance is $200,000. With that, your home equity is currently $300,000. If the lender only allows you to borrow up to 60% – 65% of the home’s value, that would mean you could only borrow $160,000 – $190,000 through a HELOC.

Shop Around For The Right Lender

Some lenders will have more flexible credit requirements than others that may make it easier for you to qualify. Beyond being able to get the loan though, shopping around may also get you a better interest rate. That can make a big difference to the cost of the loan when you get up to balances of hundreds of thousands of dollars.

Gather The Necessary Documents

Because a HELOC is a type of second mortgage, having documents ready in advance can help streamline the process. Be prepared to provide the following documentation:

• Full legal name
• Social Security number
• Date of birth
• Government-issued photo ID
• Most recent paystubs
• Tax returns for the last 2 years
• Recent bank statements
• Proof of homeowners insurance coverage

Apply For The HELOC

After choosing the lender and gathering your documents, it’s time to submit your HELOC application. Be prepared to go back and forth with the lender a bit. For example, the lender might require more information about your income or require a new appraisal for your home. Responding to any inquiries quickly will allow things to go smoothly.

Pros And Cons Of Getting A HELOC With Bad Credit

Let’s run through the benefits and drawbacks of a HELOC.

Pros

• Flexible use of funds: A HELOC offers a flexible way to tap into your home equity on an as-needed basis. If you need to cover ongoing costs, you can access funds and put them back during the draw period.
• Flexible repayment terms: The initial period of a HELOC often involves interest-only repayment options, which can give you more room in your budget, potentially to pay down other debts.
• Tax-deductible interest: If you use your HELOC funds to buy, build, or improve a home, you can potentially write off your interest payments.
• Potential credit score growth: If you make on-time payments to your HELOC, you should eventually see a higher credit score.

Cons

• Risk of losing your home: Because you use your home as collateral, you risk losing the house if you can’t keep up with your payments.
• High, variable interest rates: When compared to other financing options, HELOCs can come with higher, variable interest rates that can change monthly. A changing interest rate can be difficult to plan a budget around.
• Additional debt to pay off: If you take on a HELOC, you’re adding another debt to pay off. This could put pressure on your budget in the long term.
• Risk of overborrowing: The structure of a HELOC allows you to tap into the funds at any time. While this is convenient, it could also tempt overspending.
• Higher payment later in the loan: After the draw period, the balance freezes and you pay back the principal and interest. If you’ve been used to paying only interest, the payment could be a shock if you’re not prepared.

Alternatives To Getting A HELOC If You Have Bad Credit

While getting your credit in shape will help with any loan option, a HELOC isn’t the only choice you should consider.

Home Equity Loan

A home equity loan is a second mortgage like a HELOC, except that you get the money in one payment rather than as a line of credit. You still have two payments, but the rates are fixed. Rocket Mortgage^® offers Home Equity Loans from $45,000 – $500,000 in several terms between 15 – 30 years. ¹

Cash-Out Refinance

If you qualify for a cash-out refinance, you can stick to a single mortgage payment. You’ll still get the funds through a one-time payment. Whether this makes sense over a second mortgage like a home equity loan or a HELOC depends on a blended rate calculation. If your Home Loan Expert determines the weighted average interest rate with a second loan is higher than just doing a cash-out refi, cash out is the way to go.

Personal Loan

An unsecured personal loan doesn’t require any collateral, which means your home won’t be at risk if you cannot keep up with the payments. For many borrowers, eliminating collateral makes a personal loan worth pursuing. But the rate is higher than a secured loan.

Credit Card

The Bottom Line: You Can Work Toward A HELOC With Bad Credit

Home equity financing options can help you tap into the funds you need. In general, it’s worthwhile to spend some time fixing up your credit score before submitting your loan application. That doesn’t mean a HELOC or other alternative is automatically off the table.

While HELOCs aren’t available at this time, Rocket Mortgage does offer Home Equity Loans. If you’re ready to move forward, apply for a Home Equity Loan today.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.