Accessing financing when you have bad credit can be a frustrating experience. Whether you’re borrowing to pay off medical debts, make improvements to your home, or send a child to college, you may find yourself running up against walls if your credit isn’t perfect. However, just because it can be hard to access forms of credit like a HELOC with bad credit doesn’t mean it’s impossible.

Getting a HELOC with bad credit is 100% possible. However, due to the additional risk that lenders take on due to your credit history, the requirements and costs might shape up differently. Here, we’ll take a look at how to get a HELOC with bad credit, what you can expect from your HELOC if you have bad credit, alternatives that don’t care about your bad credit, and more. Let’s get right to it!

Eligibility Requirements for a HELOC with Bad Credit

  • A Credit Score of 620 or Higher: The vast majority of lenders will require a minimum credit score of 620. If you’re applying for a home equity loan at a credit union or small bank, they may be more willing to work with you below that threshold, but for the most part, 620 is the lowest you can go.
  • A Stable Income: Getting a home equity loan with bad credit is more complicated if you don’t have a stable income and regular employment. It’s not impossible to get a home equity loan if you’re self-employed or don’t have a ‘typical’ source of income, but you’ll probably have a more difficult time finding a willing lender, especially if you have low credit.
  • Payment History: Traditional lending institutions need to see historical proof that you’re willing and able to pay your bills on time before they agree to lend money to you. If you have bad credit, your payment history will be a big factor in whether you’re approved for a HELOC.
  • Equity in Your Home: Naturally, you need equity built up in your home to qualify for a HELOC. Most lenders will require that you have 20% equity in your home, or a loan-to-value (LTV) ratio of 80%.
    • A Healthy Debt-to-Income Ratio: Lenders will require that you have a good debt-to-income ratio to qualify for a HELOC with bad credit. Ideally, your DTI should be below 30%, including the home equity loan. It’s not unheard of for lenders to offer financing to individuals with DTI ratios as high as 40%, but if you have poor credit, that’s less likely.

    To learn more about your debt-to-income ratio and how you can lower it, check out our detailed guide.

    Can You Get a HELOC with a 580 Credit Score?

    If you have a credit score of 580, it will be significantly harder to get a HELOC. However, that doesn’t mean it’s impossible. The factors we mentioned above, like your payment history and DTI, can vary from lender to lender.

    For example, if you have a credit score of 580, or anywhere else below 620, you could potentially get approved if you have stable employment, a lower DTI, or lots of equity in your home. In short, if your credit score is weak, your other financial factors need to be stronger to make up for it.

    What Are the Risks of a HELOC for Bad Credit?

    Just because you can get a HELOC with bad credit doesn’t mean you should. Let’s take a look at some of the risks that you could face after getting a HELOC for bad credit:

    You Could Lose Your Home

    HELOCs are secured against your home. If you start falling behind on payments, you could risk losing your home to foreclosure. Therefore, it’s essential to only take out what you can pay back and to never use a home equity loan for short-term financial relief.

    You’ll Face High, Variable Interest Rates

    Having bad credit will impact the interest rates you can access. This means that over time, you’ll end up paying the lender back much more than you initially borrowed. Unless the rest of your finances are in exceptional condition, the representative (advertised) interest rates will be hard to qualify for with a credit score below 700.

    Additionally, HELOCs have variable interest rates. This means that your interest rate can change over time, like if the Federal Reserve’s interest rate changes. So, while you might save money at some points, you’re also vulnerable to large increases that can throw your finances out of order.

    Balloon Payments Are Unpredictable and Costly

    Balloon payments can be confusing, but the upshot is that your monthly payments might not cover the HELOC’s cost during the draw period. This facilitates the need for a ‘balloon’ payment—a single, often-large payment at the end of the repayment period. Balloon payments can be as small as double your monthly payment or as large as the original HELOC value. The bottom line is that they’re hard to predict, and therefore hard to plan for, leaving you in a potentially risky financial situation.

    Closing Costs Can Break Your Budget

    Closing costs for a HELOC can be anywhere from 2-5% of the total value. When you consider how much a HELOC will actually cost you, it’s essential to factor in this cost so you don’t burden yourself right off the bat.

    You Could Do Further Damage to Your Credit Score

    If you have bad credit, taking on more debt typically is not a great way to change your circumstances. Before you take out a HELOC, consider how more debt could make it even harder to secure financing in the future.

    The Bottom Line for HELOC Risks

    Just because you can get a HELOC doesn’t mean you should. The risks a HELOC can expose you to could leave you worse off financially. Before applying for a HELOC, make sure it’s 100% aligned with your financial goals and is affordable.

    If I Have Bad Credit, What Should I Do to Qualify for a HELOC?

    If you’ve considered the risks and think a HELOC is the right financial choice for you, consider taking these steps before you apply.

    1. Check Your Credit File and Make Improvements

    What if your credit score has been damaged by something you didn’t do? Although it’s rare, you should check your credit report for any inaccurate information and report it accordingly. Additionally, checking your report can show you credit lines that are in need of extra attention.

    2. Lower Your DTI if Possible

    Your DTI will influence the size of the HELOC you can qualify for, so it’s vital you know yours. Lowering it by paying off credit cards or eliminating any other debts can help you qualify for a home equity loan even if you have bad credit.

    3. Have Your Home Appraised

    To get a HELOC, you’ll need your home to be appraised. This will determine your loan-to-value ratio (or how much your home is worth vs. how much you owe on it). An appraisal will typically cost around $400 but can vary widely based on your area.

    4. Use a Cosigner

    You might be able to qualify for a HELOC more easily if you bring on a cosigner with better credit than you. However, keep in mind that your cosigner will be liable if you’re unable to make the loan payments. This could forever damage your relationship with them, so only use a cosigner if it’s essential and you have a concrete plan for making payments.

    5. Use a Smaller Bank

    As we mentioned earlier, smaller banks or credit unions might be able to make offers that large lending institutions can’t. You may be able to leverage your history with them to qualify for a HELOC or better loan terms by reminding them of how responsibly you paid back loans with them in the past.

    HELOC Alternatives for Bad Credit

    If you have bad credit and aren’t sure that a home equity loan is right for you, you might want to know if you have other options. Some potential solutions for home financing with bad credit include:

    1. Home Equity Loans

    Much like a HELOC, home equity loans give you the option to borrow against the equity in your home. The size of the loan you can receive is based on the difference between the current market value of the home and the outstanding mortgage balance.

    Home equity loans typically offer lower interest rates than many other borrowing options like HELOCs, but they share many of the same risks too. As a secured loan, you could still lose your home if you fall behind on your payments.

    2. Cash-Out Refinancing

    With cash-out refinancing, you get a new, higher-balance mortgage that replaces your old one. You’d then be able to use the difference between those two mortgages in any way that you’d use the funds from a home equity loan.

    Mortgage refinancing has higher credit score requirements, but just like with a home equity loan, your overall financial picture will ultimately influence your eligibility.

    3. Personal Loan

    Depending on what you need the financing for, a personal loan might be a better choice. While they tend to have higher interest rates, they’re generally easier to get approved for, and a major benefit of personal loans is that there’s no risk of having your home foreclosed on.

    4. SKYDAN’s Home Equity Partner Solution

    SKYDAN offers an alternative to home refinancing that allows homeowners to access their home’s equity without worrying about monthly payments or interest rates. How? Because we’re a real-estate investment company—not a bank or lender.

    This means that we’re not interested in what traditional lenders are. Bad credit, high DTI, no income—none of it matters to us. The main eligibility requirement is that you have equity in your home.

    Here’s how their residential sale-leaseback program works:

    1. SKYDAN buys your home, but you don’t move out.
    2. You then agree to lease the home back from us at a mutually-agreed upon amount, not exceeding 2 years.
    3. Rent is deferred until the end of the agreement, meaning no monthly payment is due.
    4. You may then purchase the home back (original price + deferred rent) OR sell the property, at current market value, receiving all additional equity.

    It sounds too good to be true, but it’s a safe program that genuinely helps people, like Sally, who are facing financial hardships. Ready to see if you qualify?