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 HELOC with bad credit?

A credit score that falls below 580 is generally considered bad credit. Most lenders require a credit score of at least 620 to qualify for a HELOC. With that, it’s difficult to qualify for this type of loan with bad credit. However, qualifying for a HELOC with a fair credit score is possible.                  

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?

If you have bad credit, it might be a good idea to wait before applying for a HELOC. Even if you are approved for a HELOC with bad credit, you’ll likely face a relatively high interest rate. Depending on the details of your loan, the higher interest rate could translate into thousands of extra dollars in interest payments.

Instead of jumping into the application process, consider spending time improving your credit score. A higher credit score could help you tap into lower interest rates, which can make a big difference to your borrowing costs.

If you can’t wait to improve your credit score, explore your other financing options. Even with a lower credit score, you can tap into financing solutions like personal loans and credit cards. For borrowers with a clear plan to pay off the loan, these might work better because you won’t take the risk of using your home for collateral. Keep in mind, though, these loans 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.

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

Improve your credit

If you discover that your credit score is on the lower end, it’s a good time to take action to improve it. Below are some strategies to help you boost your score:

• Commit to on-time payments. Your payment history accounts for 35% of your FICO score. With that, making on-time payments consistently often improves 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.
• Dispute inaccuracies on your credit report. Mistakes on your credit report often drag down your credit score. Comb through your credit report to find any mistakes. If you spot a mistake, report it to the credit bureaus for correction.

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

Tapping into your home equity is dependent on having sufficient home equity to lean on. Most lenders cap the amount of home equity you can borrow at 80%. With that, you’ll often need to leave 20% of your home’s value untapped.

For example, let’s say your home is worth $500,000, and your current mortgage balance is $300,000. With that, your home equity is currently $200,000. If the lender only allows you to borrow up to 80% of the home’s value, that would mean you could only borrow $100,000 through a HELOC.

Take the time to run the numbers for your situation. You can determine how much you can borrow and whether that amount will suit your needs.

Shop around for the right lender

The right lender can make all the difference. Some lenders are willing to work with borrowers who have bad credit. Others aren’t as accommodating.

Beyond finding a lender willing to work with you, it’s helpful to explore the different interest rates available across lenders. Locking in even a slightly lower interest rate can make a big difference to your finances. It’s worth the effort to shop around.

Gather the necessary documents

A HELOC is a type of second mortgage, which means you’ll find a long list of paperwork requirements during the application process. You can make things a bit smoother for yourself by pulling together the necessary documents in advance. 

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
• Recent real estate appraisal
• Homeowners insurance policy

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.

As you sort through the paperwork, quickly responding to any questions can make things go more smoothly.

Pros and cons of getting a HELOC with bad credit

Every financial decision has some advantages and disadvantages. We explore both sides of getting a HELOC with bad credit below.

Pros

Some of the pros of getting a HELOC include.

• 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, the flexibility can help you avoid a cash crunch.
• Flexible repayment terms: The initial period of a HELOC often involves interest-only repayment options, which can give you more room in your budget.
• Tax-deductible interest: If you use your HELOC funds to cover certain expenses outlined by the Internal Revenue Service (IRS), like home improvements, you can potentially write off your interest payments.
• Potential credit score growth: If you commit to making on-time payments to your HELOC, you could eventually see a higher credit score.

Cons

Of course, there are also some disadvantages to taking out a HELOC with poor credit. These include:

• Risk of losing your home: When you use your home as collateral for a HELOC, you risk losing the house if you cannot keep up with your payments.
• High, variable interest rates: When compared to other financing options, HELOCs can come with higher, variable interest rates. A changing interest rate can be difficult to fit into your budget.
• Additional debt to pay off:  If you take on a HELOC, you are adding another debt to your balance sheet. For most, this puts pressure on your budget for the long term.
• Risk of overborrowing: The convenience of a HELOC allows you to tap into the funds at any time. While this is helpful for some, it can mean overborrowing if you aren’t careful.

Alternatives to getting a HELOC if you have bad credit

A HELOC isn’t the right solution for everyone. The good news is that you have other options if you need to borrow money with bad credit. Below are some alternatives to consider.

• Home equity loan: A home equity loan involves taking out a lump sum loan and using your home as collateral. The fixed monthly payments could be a better solution for those looking for a budget-friendly option.
• Cash-out refinance: If you qualify for a cash-out refinance, you can stick to a single mortgage payment. But you’ll still get access to your home equity funds through a one-time payment.
• 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.
• Credit card: Credit cards offer another unsecured borrowing option. Most credit cards come with high interest rates, which could weigh you down. But if you can find a low interest rate option or promotional 0% APR (and pay it off during the promotion), a credit card could be the right solution for your spending needs.
• Loan from family and friends: If you have family members or friends willing to offer you a loan with a better interest rate, that’s an opportunity to consider. But make sure to get everything in writing and stick to the terms to avoid putting an unnecessary strain on your relationships.

The bottom line

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. But don’t forget to consider alternative financing options to determine if a home equity line of credit or similar loan type is best for your situation.

If you are 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.