Do you know what’s better than a home equity line of credit? A home equity line of credit with bad credit.
A Home Equity Line of Credit (HELOC) is a loan you can use to pay for things like home improvements, college tuition, or just plain old bills.
The best part is that it’s an unsecured loan—meaning you don’t have to put your house up as collateral.
This is the perfect option if you’re looking to pay off some debt without selling your house. But how do you get one?
There are a few ways to get a HELOC with bad credit! We’ll break this down into 7 steps that you can follow to get HELOC with a poor credit score.
7 Steps For Getting A HELOC With A Poor Credit
Step 1. Check Your Credit Reports
The first step to getting a home equity line of credit with a poor credit score is to check your credit reports. This will help you understand the specific factors that are affecting your score.
Your credit score is calculated using information from three credit bureaus: Experian, Equifax, and TransUnion. Each bureau may have different information about you and will use other methods of calculating your score.
You can get free copies of your credit reports at AnnualCreditReport.com once per year from each bureau. You can also request a free report from each bureau if you see an error on your report or if someone has opened an account in your name without your authorization.
If you find errors on one or more of the reports, such as late payments or incorrect information about accounts that are not yours, you should dispute these errors with the bureau(s) who provided them so they can be corrected on future reports.
Once you’ve got a copy of your credit report, look for any negative marks or collections that aren’t yours. If you find anything like this, dispute it with the appropriate company within 60 days (or 30 days in some cases).
You can look out for errors such as:
- Account tampering
- Balance tampering of any sort
- Applications for credit you didn’t make
- Missing monies
- Approved purchase payments that you didn’t make
You can request that all of these things be worked on, especially if you use a credit repair company.
Step 2: Calculate your Estimated LTV & Organize your Information
Before you apply for a home equity line of credit, you must ensure you have all the information you need to complete the process. The most important thing is accurately estimating how much money you can borrow from your home’s equity.
The best way to get this estimated loan-to-value (LTV) ratio is by using a mortgage calculator or an online LTV estimator. These tools will help you determine how much money you can borrow based on the value of your home, as well as other factors like your credit score and down payment amount.
You should also organize any other financial documents that may be relevant to your application, including tax records, employment history, and bank statements.
Calculating your estimated LTV is relatively straightforward: just enter the price of your home and its square footage into the calculator, along with details about any existing mortgage or liens on the property (if there are none, enter 0).
Ensure that you are entering accurate numbers—if you get too high an estimate here, it could mean trouble later on when it comes to closing.
You can find various calculators online; we recommend using one that lets you compare multiple lenders’ offers side-by-side so that you can get an idea of what kind of rates each bank offers before deciding which one is best suited for your needs!
To calculate your estimated LTV, multiply the amount of your current mortgage debt by 75%. This is the percentage of the total value of your home that you’re borrowing.
If, for example, you have $100,000 in debt on your house and it’s worth $300,000, but the property taxes and homeowners’ insurance add up to $1,500/year, multiply $100k by 0.75 (or 75%). That means that your estimated LTV would be $87k.
Most lenders use 85% as their maximum LTV but sometimes go as high as 90%. If your home has appreciated significantly since you bought it or if you have other assets that could be used as collateral (such as stocks or bonds), then a lender may be willing to lend up to 95%.
If you’re looking for help with this step, here are some tips for estimating your LTV:
- Add up all your outstanding debts, including credit card debt and any other loans (such as student loans or car payments).
- Add up all payments due each month and divide that by 12 to get an annual total. This will give you an idea of how much money you could borrow against your home’s equity if needed.
- To figure out what kind of interest rate you might qualify for when taking out a HELOC on top of an existing mortgage, take a look at current rates offered by lenders in your area—you can find these online or by contacting local banks directly—and use those numbers as benchmarks for negotiating with lenders later down the line when applying for HELOCs directly through them instead (if possible).
You will need to organize the following information:
- Your original mortgage documents
- A current statement of your mortgage showing your balance, interest rate, monthly payments, and loan term.
- Proof of income
- Proof of Identity
- Other assets you own (besides your home)
- Information on other loans
Step 3: Apply for a HELOC
Now that you’ve gotten your credit score and evaluated it, it’s time to apply for a home equity line of credit.
You’ll need to find out where to apply for your HELOC to get started. This can be done by talking with your bank or credit union or searching the internet for “home equity line of credit lenders.”
These are the things to look out for when looking at HELOC offers:
- The APR of the loan. It’s great to look at these because most HELOCs offer variable or fixed interest rates. Fixed APRs may be best for you.
- The amount of the credit line
- The minimum payment amount required of you. You must be able to choose how quickly you’ll want to repay your loan and how much you must pay at a minimum every month. Some lenders will charge you automatically.
- Expiry date. HELOCs can expire. They expire after a stipulated amount of time set up by the lender. And after this period, you will keep paying the balance of any debt you still owe. The expiration date may be up to 10 years from your initial borrowing.
Once you’ve found an excellent fit lender, you can begin the application process.
They’ll first want to know how much money you want to borrow and how long you plan on keeping it. This will help them determine if they can give you a loan and what kind of interest rate they will offer you.
Next, they’ll ask about your financial history and how long you’ve had your current home mortgage or any other loans with them (if any). They will also want proof that all loan payments have been made on time every month over the past twelve months (or more).
Finally, they’ll ask about any income sources that could help pay back this new loan, such as monthly wages from employers or other sources like rental properties or rental income from tenants who live in those properties but are not related by blood or marriage.
You should know that some lenders may also require additional information during your application process. Always keep all needed information when applying for a HELOC (see above for information you may need).
Step 4: Submit Your Income Documentation
This is where you’ll need to confirm that you can afford to make payments. You’ll also need to prove that you have income sources available to help pay back the loan if it’s not paid in full. This is a more complex process than it sounds, so we’ll break it down into steps for you here:
Provide documentation of your income from the past two years. If you’re self-employed, this may mean providing copies of W-2s, 1099s, or other tax forms showing how much money you made during those years.
If your source of income has changed recently, call your lender and ask what additional documentation they might need from you (they may want proof of how much money is coming in now).
If you’re unemployed or underemployed, documentation will include letters from employers or benefits providers stating how much money was collected in benefits each month during that time period;
If your situation has remained static since then (and there’s no reason why it shouldn’t have), then no additional evidence should be needed at this point—but let the lender know anyway!
To show proof of income, you’ll need the following documents:
- Latest pay slip
- Copies of W-2 and 1099 forms
- Letter from employer (stating proof of income)
- Profit and loss statement (for self-employed/ business owners)
- Bank statements
Some lenders may only require your tax returns for proof of income, especially if you do not have credit. But if you have credit, the lender may require more information and documentation.
Step 5: Wait for Lender’s Decision
If you’ve made it through the first four steps of the process and are waiting for your lender to get back to you, we’re rooting for you!
You’re probably feeling pretty good about your chances, and we think you should keep it up!
Here are a few tips to help keep your spirits high as you wait:
- Remember that getting a HELOC is never a sure thing, even if your credit score is bad. Many factors go into whether or not a lender will approve your application, and one of those factors is the condition of the real estate market where you live.
- If the market is hot (or just heating up), it might be harder to get approved than if it were cooling off—but that doesn’t mean it isn’t worth trying!
- Don’t forget that even though you have poor credit, there are other ways to get money from your home besides getting a HELOC from a bank or credit union.
- You can sell some of your belongings on eBay or Craigslist (or even give them away!), take out an interest-free loan with a friend or family member who has good credit, or ask around if anyone knows someone who might lend you money.
The waiting game is the less-activity but serious part of the HELOC. Once you’ve submitted your information to the lender and they have a chance to look it over, they’ll decide whether or not they think they can give you a home equity line of credit with your poor credit score.
If they decide to offer you one, they will send you an approval letter containing all the details about the loan.
This letter will include how much money you can borrow, for how long, and what interest rates and fees are associated with the loan. You will also receive an email when your request has been approved or denied.
Step 6: It’s Time for Home Appraisal
A home appraisal is a professional inspection of your property to determine its value. The lender will want to know that you’re getting a fair deal, and they’ll want to know that you’ll be able to afford the loan payments you’re taking on. This is why you’ll have to provide proof of employment, income, and residence.
If you’re self-employed, this means providing pay stubs or tax returns for the past year or two. If you don’t have those, it’s time to get creative! A letter from your accountant can help prove your income, as can letters from customers who’ve paid for services rendered or products sold.
The appraiser will also want proof of residence, typically done by providing them with utility bills showing that your name is listed. If possible, try not to let too many months go by between when you apply and when the appraiser comes out.
If they’re unable to find any utilities in your name (or none that are recent enough), then they may not be able to give an accurate estimate of how much equity there is in your home because they couldn’t verify its value!
Step 7: Close on the HELOC
Congratulations! You’re almost there.
Now that you’ve found the right lender, fill out all the paperwork, and got your credit score up to snuff, you’re ready to close your HELOC. The process is simple.
Just follow these steps:
- Ensure you have sufficient funds in your checking account to cover the closing costs and fees associated with getting a HELOC.
- Sign all of the documents sent to you by your lender and send them back as soon as possible! If you don’t sign within 30 days of receiving them, the deal could fall through, so don’t procrastinate!
- Wait for one more letter from your lender confirming that they received everything from you on time before calling in for final loan approval.
- Call your lender when they give you final approval and tell them how much money from your HELOC will be used for each specific purpose (paying off debt or making improvements). Then enjoy using it!
FAQs About HELOC
What is a HELOC?
A HELOC is a Home Equity Line of Credit. It’s a loan that lets you take out as much money as you need, up to the value of your home.
The interest rate will be fixed or variable, depending on your choice. You can use it for home improvements, education expenses, medical bills, or debt consolidation.
Why Would I Want a HELOC?
A HELOC is a good option if you want to take advantage of lower interest rates and the ability to borrow more money than a traditional mortgage.
For example, if you need to make some home improvements, a HELOC can help you pay for them. Or if you have some other expenses that will soon be coming up—like paying for college tuition—a HELOC can give you access to the funds when needed.
What Do I Need to Be Approved for a HELOC?
To be approved for a HELOC, you need to have good credit and show that you have been making consistent payments on your current mortgage.
If you have any late fees or other blemishes on your credit report, getting approved for a HELOC may be harder.
You also need to show that you’re not using the money in your HELOC to get out of debt—for example, by paying off credit cards with the money from your HELOC.
Can I Get a HELOC With a Poor Credit Score?
Yes, you can. A lot of people with poor credit scores can get HELOCs. The key is that you will have to pay a higher interest rate than someone with a better credit score.
However, it’s important to note that some lenders may not be willing to work with you if your credit score is too low—and even if they do, they’ll probably require that you pay an additional fee (which will be added to your monthly payments) to get the loan.
So while people with poor credit scores can get a HELOC, they might not be able to do so at an affordable rate or with no additional fees attached.
How Can Bad Credit Affect My HELOC Application?
If you have bad credit, you may be wondering how that will affect your ability to get a home equity line of credit (HELOC).
The good news is that a HELOC can be a great way to rebuild your credit if you’ve had some issues.
A HELOC allows you to borrow against the equity in your home, which means that as long as you repay the loan on time and keep up with other payments, your credit score will improve.
However, some restrictions are put in place by lenders regarding these types of loans. If you have bad credit or no credit at all, lenders may require that an appraisal be performed to determine your house’s value before deciding whether or not they want to make the loan.
How Can I Improve the Chances of My HELOC Application Being Approved?
HELOC applications are different from most other loan applications. First, you must know that you don’t have to be approved for a HELOC to use one.
You can use an existing line of credit with your bank or credit union to obtain the funds necessary to pay off your HELOC balance.
Before applying for any HELOC, it’s essential to consider whether or not you need access to these funds immediately. If so, you should apply with a lender providing short-term financing options.
Conclusion: Is It Hard To Get Home Equity Line Of Credit?
If you have bad credit, don’t worry. You might still be able to get a HELOC! The trick is to ensure you extend it based on your home value, not some “inflated” appraisal online.
And if you are the owner of said home, consider, once again, getting a signature loan instead. They both have flexible credit limits and similar interest rates.
Just remember this all comes down to securing yourself before securing many home improvement projects.