Can (And Should) You Get A HELOC With Bad Credit?
Are you a homeowner who’s been binge-watching a ton of HGTV and think it’s time to make some updates around the house. If you have less-than-stellar credit, you may not be sure if it’s a good idea (or even possible) to get a home equity line of credit (HELOC). Maybe you have a low credit score or a bad credit history –– does that mean you can’t access the equity in your home?
The good news is that a HELOC can help you make those home improvement dreams a reality. However, there are certain things to keep in mind before you get started. We’ll take a look at some pros and cons of getting a HELOC and how your credit score can affect your approval.
But first, we’ll get something important out of the way.
What, Exactly, Is a HELOC?
The acronym HELOC stands for Home Equity Line of Credit. Simply put, equity is the difference between the overall value of your home and the remaining balance on your primary mortgage.
A HELOC works kind of like a credit card: your lender gives you a credit limit, and you have a time period (usually about 10 years) to make withdrawals up to the limit of your line of credit, on an as-needed basis.
That limit is determined based on your home’s existing equity (more on that later).
This makes a HELOC different from a home equity loan, in which you are borrowing against the value of your home, but the lender gives you a lump sum that you have to pay back at a fixed interest rate. HELOCs tend to have variable rates, although versions with fixed rate interest do exist.
With a HELOC, your home is the collateral on your line of credit. Typically, a 10 year draw period is followed by a repayment period of up to 20 years. If you can’t make your payments, your home risks foreclosure.
So, How Does This Work in Real Life?
Let’s say you need to replace your home’s leaky roof. This could be a costly (but necessary!) update and many people need to borrow money to pay for it. One way to do this is with a HELOC where you borrow from existing equity in your home.
In another scenario, your home is in perfect working order, but you want to increase the value by making some improvements: a kitchen remodel, a deck, or a fresh coat of paint for heightened curb appeal. You could use a HELOC to fund these projects as well.
How Does Your Home’s Equity Impact the Amount of Your Line of Credit?
With a HELOC, a lender will let you borrow from up to 80 or 85% of your home’s value. The equity of your home determines the actual limit, however. Remember, equity is the difference between the value of your home and what you still owe on your primary mortgage.
So to figure out the maximum you will be allowed to withdraw from your line of credit – once you’ve calculated the dollar amount of 85% of your home’s value – you subtract from it the remaining balance on your primary mortgage. The result will be the amount of your line of credit.
Some of us find math more challenging than others, so if you have a question about how much you can borrow, contact a friendly UMe team member.
What’s a Good Credit Score for a HELOC?
If you’ve got a credit score of 620 or higher, you’re likely to qualify for a home equity line of credit. However, if that’s not you, let’s take a look at your options.
What If My Credit Score Isn’t Great?
If you have a credit score lower than 620, you can potentially still qualify for a line of credit. Lenders look at other things: the existing equity in your home, as well as your debt-to-income ratio (DTI). The DTI is simply the number of debt payments you have in a given month up against your monthly income. A ratio of 43 percent is usually as high as most lenders are willing to go.
There are additional things to keep in mind if you are trying to secure a HELOC.
- Whether you get a home equity loan or a HELOC with a bad credit score, you will be using your home as collateral.
- Your lender might change or freeze your credit line, for example, if the value of your home goes down.
- Interest rates might not be very favorable.
A Few More Alternatives:
Could I get an unsecured personal loan instead?
The short answer: Yes! Some people prefer to go this route instead of a home equity loan or HELOC. While your home isn’t collateral with this loan option, it definitely comes with tradeoffs. Although you don’t have to worry about the foreclosure of your home, you will be looking at higher interest rates, since these types of loans tend to be riskier for lenders.
Balance transfer credit cards
Some people opt for balance transfer credit cards. This can be the preferred route if you want to consolidate high-interest debt.
Get Your HELOC With UMe Today!
If you’ve looked at your credit history, your LTV, and your DTI, and a HELOC seems right for you, look no further than UMe.
With UMe, you can now borrow up to $400,000, drawing money for up to 10 years. What’s more, money becomes available again as you pay down your line of credit.
We make things easy with desktop appraisals for loans with 60% LTV and a loan amount of up to $200,000. Enjoy fast, simple access to cash via ATM by transferring your funds to your UMe checking account.
Take advantage of our new 5.99% 12-month APR* HELOC intro rate and get started on that dream home improvement project!
learn more about HELOC
*APR is Annual Percentage Rate. The Home Equity Line of Credit APR is a variable rate which is based on the Prime Rate. Loan approval and rate are based on a verification of income, an evaluation of your creditworthiness, and property evaluations which include Loan-to- Value (LTV). Your rate will never exceed 18.00% or be less than 4.00% — unless there is an initial discount rate that is offered below 4.00%. If you cancel your loan, third party fees may apply. Costs include a $500 title insurance fee and a non-refundable appraisal fee, paid directly to the designated appraisal company. Property insurance is required. Loan amounts up to $400,000. For additional details, please call the Credit Union at (818) 238-2900. All loans and rates are subject to change. UMe is proud to be an Equal Housing Lender.