Can I Get a HELOC with Bad Credit?

Nationwide, homeowners are sitting on over $35 trillion in equity, which boils down to an average of nearly $200,000 that each household could borrow. Many families need a large cash injection but want to hold onto their property—HELOCs are a logical solution.^1,2

At the same time, Americans are struggling with record credit card debt, only 16% are saving the recommended amount for retirement, and nearly 68% have bad, subprime, or no credit scores.^3,4 There’s a huge number of homeowners with equity and the need for cash who still struggle to qualify for loans based on their credit history. 

You may be asking: “Can I get a HELOC with bad credit?” The answer is yes, but you’ll pay a premium for it. Let’s dive in.

Understanding HELOCs and Credit Requirements

When you apply for a HELOC, a lender will be deciding on more than a yes or no. They’ll look at your financial situation and credit history in order to: 

• Extend a loan offer or decline your application
• Establish a specific interest rate for your loan based on numerous factors
• Add any limits or additional fees to your loan in relation to your creditworthiness

How Credit Scores Impact HELOC Approvals

Credit scores are essentially a very brief snapshot of your credit history and reliability, and scale from 300 to 850. They don’t simply reflect whether or not you pay your bills on time, but also help illustrate how much experience you have with various types of debt products and whether you understand how to use and balance debt effectively. 

While they aren’t the only factor in how lenders respond to HELOC applications, here’s a summary of how scores break down⁵:

• 579 or lower: Unlikely to be approved for traditional loans, may need to get creative
• 580: Common minimum from lenders who work with bad credit loans
• 580 to 639: Poor, may be offered a higher interest rate and higher fees
• 620: Common minimum from traditional lenders
• 640 to 699: Fair, may aim for the average HELOC rate of 8.53% (as of December 2024)⁶
• 700 to 749: Good, should receive good terms
• 750 and up: Excellent, with access to the best rates available

See more on the minimum credit score for a HELOC.

Why Lenders Consider Creditworthiness

From a lender’s perspective, a loan is a type of gamble. In order to avoid losses and improve profits, they evaluate the level of risk for each application based on how your financial picture and history help predict whether or not you’ll repay the loan. 

Your creditworthiness is calculated based on many factors including: 

• Credit scores
• Debt-to-income (DTI) ratio, or how much you owe vs. earn each month
• Income history and stability
• Payment history on other loans
• Red flags such as prior bankruptcy, foreclosures, or loan defaults

Challenges of Getting a HELOC with Bad Credit

It’s not just a red-light-green-light scenario. A HELOC for applicants with bad credit often comes with higher costs and limits than for borrowers deemed more creditworthy. 

Higher Interest Rates and Fees

The interest rate a lender offers isn’t all about you—it starts with how the economy has shaped the current Fed (interest rate banks charge each other) and prime rates (interest rates charged by banks) and includes factors such as your: 

• State, rural/metropolitan location, and specific neighborhood
• Amount of equity and loan-to-value (LTV) ratio
• Relationship with an individual lender

Once those factors are taken into account, however, you can expect that a poor credit score and history is going to mean paying more for the loan. With the national average HELOC rate at 8.53%, that can mean⁶:

• Interest rates into the double digits, as high as three or more points over the average
• Additional or higher administrative fees and penalties
• Less welcoming loan terms such as stiff penalties for early payoff

Reduced Borrowing Limits

Some lenders may have stricter limits on how much you can borrow through a HELOC if you have poor credit. Rather than an 85% or even 90% loan-to-value (LTV) ratio—the value of your current mortgage plus the new loan compared to current home value—you may be restricted to 80% or lower.

Options for Securing a HELOC with Bad Credit

It’s not the end of the story if you’re a homeowner in need of cash with bad credit. You can increase your chances of approval by: 

Improving Your Credit Before Applying

Even small changes in your credit score can impact your application’s viability and the rates you qualify for. Before applying, take a month or two to boost your score. 

Start by ordering and reviewing your current credit reports, and then consider these steps: 

• Dispute any inaccuracies
• Get all outstanding debts current and ensure your payments are on time
• Pursue credit card limit increases that improve your utilization ratio 
• Use credit-building services that leverage on-time bill paying such as rent
• Avoid applying for new loans or credit cards that trigger credit inquiries
• Become an authorized user on someone else’s credit card

See related: Should You Use a HELOC to Pay Credit Card Debt

Exploring Lenders Specializing in Bad Credit HELOCs

Apply with online lenders that specialize in bad-credit HELOCs in addition to any traditional lenders that you have a positive relationship with, such as a long-time bank or credit union. Regardless of your credit score, be thorough and active in seeking and comparing offers to find the best deal for you.

Considering Alternative Financial Products

A HELOC isn’t the only option. Consider other products and solutions such as: 

• Cash-out refinance
• Personal loan
• Sell and stay program
• Loans from friends, family, or employer
• Home equity investment (HEI)
• Reverse mortgage

Tips for Increasing Approval Chances

While you can try including a dozen homemade cookies with your application, there are more effective ways to boost your chance at a HELOC approval. 

Use a Co-Signer or Co-Borrower

If you have a friend or family member with a high credit score and a high degree of trust in you, consider asking them to be a co-signer or co-borrower on your HELOC. The lender can leverage that individual’s greater creditworthiness to extend approval and a lower interest rate to you, knowing the loan is backed both by collateral and a reliable second individual. 

Maximize Your Equity Collateral

It might sound surprising, but you could qualify for a larger HELOC (Home Equity Line of Credit) at a lower rate compared to a smaller credit line. Lenders often prefer larger loans because they have higher profit potential, so they may be willing to take on slightly more risk.

With a HELOC, you only pay interest—and eventually principal—on the amount you actually withdraw. This means you can be approved for a larger amount but choose to use only a portion of it, keeping your monthly payments and debt manageable. 

Provide Additional Documentation to Support Your Application

Getting in over your head with debt doesn’t make you a unicorn—in fact, you’d be hard-pressed to locate any individual who wouldn’t benefit from a do-over in past financial decisions. 

Rather than filling out all the application fields and leaving it at that, go to the next step and provide a personal letter along with any supporting documents to explain damage to or red flags on your credit history. This could include: 

• A past hardship such as job loss or major medical bills
• Financially abusive actions by a former spouse or family member
• A clear explanation of how you’ve addressed the situation, improved your skills, etc.

Safer Alternatives to HELOCS

With all this in mind, is a HELOC a good idea?

A HELOC isn’t the only way forward. Before you take on expensive equity debt, consider these alternatives: 

• Tighten your budget and save up if the need isn’t urgent
• Sell items you own or get a side gig to bring in more income
• Downsize to a smaller home if yours is larger than you need
• Sell your home to an investor and stay on as a renter

Consider a Debt-Free Option to Access Your Equity

As a homeowner, do you know the current value of your equity? You can estimate it by subtracting what you owe on your mortgage principal from the results of a free online home valuation tool. 

Equity is a resource that you can use without moving out of your home, but borrowing against it comes with a high price tag for those with troubled credit histories and lower credit scores. 

The other way to cash out your equity without leaving your home is through a sell and stay transaction. With this two-step transaction, you can access your home equity by selling your home and continue living there as a renter.* 

In addition to freeing up equity cash, you can also strike some bills off of your monthly budget—no more property tax, homeowners insurance, or essential home repairs. And since it’s not a debt product, you won’t have interest payments that take years or decades to pay off. This allows you to utilize your home equity to cover important costs or debts, helping you find financial freedom.

Consider all your options before you commit to more debt. Call us today and a representative will reach out to review our offering and answer your questions so you can decide if Truehold's sell and stay option is the best choice for you. 

Disclaimer*: After the home sale, you must comply with the terms of your lease to continue living in the home. This includes making timely payments on your rent for your minimum lease term (which ranges from 6 – 24 months).

‍

Sources: 

1. FRED.  Households; Owners' Equity in Real Estate, Level. https://fred.stlouisfed.org/series/OEHRENWBSHNO‍
2. Bankrate. Home equity data and statistics: Why they matter to homeowners. https://www.bankrate.com/home-equity/homeowner-equity-data-and-statistics/‍
3. EveryIncome. About EveryIncome. https://everyincome.com/about/‍
4. Review 42. How Many People Have Bad Credit? [2024 Statistics & Trends]. https://review42.com/resources/how-many-people-have-bad-credit/‍
5. Credible. Have Bad Credit and Want a Home Equity Loan? Here’s What to Do. https://www.credible.com/blog/mortgages/home-equity-loan-bad-credit/‍
6. Bankrate. Current home equity interest rates. https://www.bankrate.com/home-equity/current-interest-rates/