Homeowners

HELOC Help: Tips for Getting Approved If Your Credit Isn’t Perfect

Homeowners with less-than-perfect credit score may be nervous about applying for a home equity loan. But they may still be able to qualify for a Home Equity Line of Credit (HELOC).

Lenders are increasingly looking at your full financial picture when reviewing applications. If you have paid down your loan balance and you have stable income, you may be able to get a HELOC.

Borrowers with lower credit scores may face stricter terms or higher interest rates, but a strong financial profile and the right lender can help keep your options open.

And if a HELOC isn’t the best fit, there are other options that may help you to tap into your home’s equity, such as cash-out refinances.

"Some people think you have to have perfect credit or pristine employment history—you don’t," said Jacob Naig, a real estate agent and investor in Des Moines, Iowa.

Requirements to qualify for a HELOC

Using a HELOC is similar to a credit card for homeowners. You can borrow against the equity in your home up to a certain amount, typically up to 80% to 85% of your home’s value minus what you still owe on the mortgage.

A HELOC provides you with ongoing access to funds for a set period of time (called a draw period) that can be used for renovations, debt consolidation, or other major expenses. You only use what you need.

Lenders usually look for a credit score of at least 620, but some may consider lower scores depending on other factors.

"If you have strong equity or a long employment history, especially with the same employer, you may still qualify,” said Naig.

Other requirements to qualify for a HELOC include:

• Steady income and employment: A stable two-year history of employment can help offset a weaker credit score.
• Low debt-to-income (DTI) ratio: This is how much debt you owe compared to how much you earn. Staying below 45% DTI is ideal, but some lenders may go higher for borrowers with credit scores above 720.
• Home equity: The more equity you have, the stronger your application will be. Qualified borrowers may be able to access up to 90% combined loan-to-value (CLTV).
• Complete documentation: Expect to provide pay stubs, W-2s, tax returns, mortgage statements, and insurance declarations.

The bottom line is: The better your financial shape, the more likely you are to unlock your home equity.

How to improve your chances of qualifying for a HELOC

If your credit isn’t ideal, you can still take steps to have lenders look more favorably on your application.

Start by working with a lender who has a credit improvement partner.

"They can analyze your credit and give tips on how to improve the score," said Sam Alhumdi, senior loan officer with New American Funding in Novi, Mich.

Paying down credit cards, correcting errors on your credit report, and maintaining a consistent on-time payment history can go a long way. Saving up to show cash reserves, such as a 401(k) or savings account, can also help.

Adding a co-borrower with stronger credit or higher income can also boost your application.

Finally, get your paperwork in order. Lenders want to see income stability, asset statements, and a clean paper trail. A short letter explaining any past credit dings can also provide helpful context.

Home loan alternatives to a HELOC

If a HELOC isn’t the right fit, or if your credit score isn’t high enough to qualify, there are other options worth exploring.

Cash-out refinances can provide access to your home’s equity with more flexible credit requirements. Borrowers generally need a minimum credit score of 580, although some lenders only allow scores of 620 or higher.

These loans replace your existing mortgage with a new loan that’s larger than what you currently owe on your mortgage. This allows you to pocket the difference and then pay back the new mortgage every month.

You don’t need perfect credit to unlock your home’s value. While accessing your home’s equity with below-average credit may take extra effort, it may still be worth exploring.

Sam Alhumdi NMLS # 32670