Trustpilot
Loading...
Loading...Loading...
Think of it like this: if you've built up enough equity in your home through mortgage payments and property appreciation, tapping into that home value can be an attractive prospect for making home improvements, consolidating high-interest debt, or accomplishing other financial and lifestyle goals. If you've struggled with finances in the past, your credit history may discourage you in the attempt to access that equity. But here's what this means for you: it's not a permanent black mark against your borrowing ability. You can work steadily toward qualifying for a home equity line of credit even with less-than-perfect credit by making strategic progress on multiple fronts.
Although AmeriSave doesn't currently offer HELOCs, some of the tips offered here may give you a leg up when working to qualify for home equity financing or any other funding option that uses your home's value as collateral.
Can you realistically get a HELOC with bad credit? A credit score that falls below 580 is generally considered bad credit by most industry standards. Most lenders require a credit score of at least 620 to qualify for a HELOC, with many preferring to see scores of 680 or higher. With these requirements in mind, it's genuinely difficult to qualify for this type of loan with bad credit. However, qualifying for a HELOC with a fair credit score between 620 and 680 is definitely possible if you meet other requirements.
In addition to a credit score that passes muster with lenders, they expect borrowers to meet other requirements related to their home equity amount, stable income verification, manageable debt-to-income ratios, and clean credit report history. Let me walk you through what lenders actually look for when evaluating HELOC applications.
According to RefiGuide's comprehensive 2025 analysis, most lenders require minimum credit scores between 660 and 700 for traditional prime-rate HELOCs offered by banks and credit unions. Borrowers with credit scores above 740 typically receive the most favorable interest rates and flexible terms. However, alternative financing options exist for those with lower credit. Non-QM lenders may approve borrowers with credit scores as low as 620, especially if compensating factors like low loan-to-value ratios, high cash reserves, or strong rental income exist.
You'll likely need at least fair credit to apply for a HELOC successfully. The statistics tell an interesting story: just 4.6% of HELOCs issued were for clients with subprime credit scores in December 2024 data from Equifax. Scores below 620 were considered subprime in this analysis. These subprime borrowers represented only 2.3% of the total outstanding credit limit on HELOCs. While lower credit scores represent a small percentage of approved applications, the data proves it's possible to qualify with challenged credit if you meet other stringent requirements.
What is the absolute lowest credit score you can have for HELOC approval? There's no universal HELOC standard for bad credit because every lender maintains different underwriting standards and risk tolerances. While some more flexible lenders will let you qualify with a credit score of 620, you may find you have significantly more options in the marketplace if your score reaches 680 or better. At that level, more mainstream lenders become accessible and rate competition improves.
The broader market environment for HELOCs in 2026 presents opportunities for qualified borrowers. According to Bankrate's December 10, 2025 survey, the national average HELOC interest rate stood at 7.81%, representing the lowest level since 2023. This rate held steady for five consecutive weeks as the Federal Reserve lowered interest rates by an expected quarter-point at its final meeting of 2025.
Home equity lines of credit feature variable interest rates that fluctuate based on the prime rate, which in turn ties directly to changes in the Federal Reserve's monetary policy decisions. The prime rate currently stands at 7.5% according to The Wall Street Journal data. Given the typical pricing structure where HELOC rates run 0.50% to 1% higher than prime rate, most borrowers can expect rates ranging between 8.0% and 8.5% in 2026.
The Federal Reserve began gradually declining the federal funds rate in September 2024, with expectations for continued rate decreases heading into 2026. According to Experian's market analysis, rates are expected to continue dropping throughout 2026, making it potentially an advantageous time to consider a HELOC with a low introductory offer for the first six to twelve months.
Home equity levels have reached historic highs, providing more borrowing capacity for qualified homeowners. As of 2025, the average mortgage-holding homeowner held more than $200,000 in tappable equity relative to their remaining mortgage balance. Overall HELOC credit limits rose by $18 billion from Q1 to Q2 2025, indicating expanded access to home equity financing.
Before we get into everything you need to know to qualify successfully, it's helpful to understand both the red flags that lenders actively look for and the warning signs that a HELOC may not be right for your specific situation.
Your credit score falls too low for most lenders. Although you can sometimes receive approval with a score on the lower side, you generally want a score of 680 or better to give yourself meaningfully more lending options. According to Freedom Mortgage's analysis, borrowers with credit scores of 720 or higher receive preferential treatment from most HELOC lenders.
You have negative events on your credit report that create waiting periods. Some items appearing on your credit, like a bankruptcy filing or foreclosure completion, are usually associated with mandatory waiting periods before you can be approved for new mortgage debt. These waiting periods typically range from two to four years depending on the severity of the event and the specific lender's overlay requirements.
Low equity makes HELOC impractical for your goals. When you have a HELOC, lenders require that you retain a minimum amount of equity in the house for financial cushion. This equity buffer could be as much as 35% to 40% depending on the lender, so you have to make absolutely certain that the equity you can actually access is enough to accomplish your goals. If you need $50,000 but can only access $15,000 after lender restrictions, a HELOC won't solve your problem.
Your debt-to-income ratio exceeds lender thresholds. According to multiple lender analyses, the standard DTI cutoff for HELOCs remains around 43% in 2025, though lower is always better for qualification and rate purposes. If your total monthly debts including mortgage, car loans, credit cards, and other obligations total $4,000 and you earn $10,000 monthly before taxes, your DTI calculates to 40%, which generally falls within acceptable ranges.
If you have bad credit, it might genuinely be a better idea to wait before applying for a HELOC and focus first on credit improvement. Even if you manage to get approved for a HELOC with bad credit, you'll almost certainly face a relatively high interest rate compared to borrowers with good credit. Depending on the specific details of your loan, the higher interest rate could translate into thousands of extra dollars in interest payments over the life of your credit line.
Here's what I mean by that: let's say you borrow $50,000 through a HELOC. A borrower with excellent credit might receive an 8% interest rate, while a borrower with fair credit around 640 might face a 10% or higher rate. On a $50,000 balance, that 2% difference costs approximately $1,000 per year in additional interest. Over a typical 10-year draw period, that's $10,000 in extra costs just due to credit score differences.
Instead of jumping immediately into the application process, seriously consider spending six to twelve months improving your credit score through strategic actions. A higher credit score could help you tap into significantly lower interest rates, which makes a massive difference to your borrowing costs and monthly payment obligations.
If you genuinely can't wait to improve your credit score due to urgent financial needs, explore your other financing options carefully. Even with a lower credit score, you can potentially tap into financing solutions like personal loans and credit cards. For borrowers with a clear plan to pay off the loan relatively quickly, these alternatives might work better because you won't take the substantial risk of using your home as collateral. Keep in mind, though, that unsecured loans typically come with higher interest rates than secured home equity products.
If you've decided to pursue a HELOC despite credit challenges, use these specific steps as your strategic roadmap.
Start by checking your complete credit report from all three major bureaus to determine exactly where you stand. Depending on your situation, you might be pleasantly surprised by your credit score if you've been making consistent progress. Or you might realize that your credit score is lower than you anticipated due to items you weren't aware of.
Regardless of the number you discover, it's critically important to understand your precise starting point before developing your improvement strategy. You can access free credit reports from all three bureaus through AnnualCreditReport.com, and many credit card issuers now provide free FICO score access to their customers.
If you discover that your credit score falls on the lower end of acceptable ranges, it's an excellent time to take focused action to improve it before applying. Here are the most effective strategies to help you boost your score within six to twelve months.
Commit to making every single payment on time without exception. Your payment history accounts for 35% of your FICO credit score calculation. With that massive weight, making on-time payments consistently represents the single most important action to improve your credit score over time. Set up automatic payments for at least minimum amounts to ensure you never miss due dates.
Pay down revolving credit card debt aggressively. If you carry large amounts of credit card debt, make a concrete plan to pay it off ahead of schedule. Lowering your credit card debt balances directly impacts your credit utilization rate, the ratio of balances to credit limits, which can help improve your credit score significantly. Aim to keep utilization below 30% on each card and below 10% overall for maximum score benefit.
Dispute any inaccuracies on your credit report promptly. Mistakes on your credit report often drag down your credit score unfairly. Carefully comb through your credit report to find any reporting errors, incorrect account information, or outdated negative items. If you spot a mistake, report it immediately to all three credit bureaus for investigation and correction. The bureaus must investigate within 30 days.
According to F5 Mortgage's analysis, individuals who actively manage their credit ratings often qualify for more advantageous HELOC lending rates, underscoring the significance of proactive financial management. As of early July 2025, the average HELOC rate was around 6.64%, highlighting the need for improved credit scores to access better terms.
While improving your credit score definitely takes time and sustained effort, it's absolutely worth it. An improved credit score can help you tap into meaningfully lower interest rates on a HELOC, which could save you thousands of dollars over the life of your credit line.
Tapping into your home equity depends entirely on having sufficient home equity built up to lean on after meeting lender requirements. Most lenders cap the amount of home equity you can borrow at 80% to 85% of your home's appraised value through combined loan-to-value calculations. With that restriction, you'll often need to leave 15% to 20% of your home's value untapped as a financial cushion.
Let me give you a concrete example of how this works. Let's say your home appraises at $500,000 in current market value, and your current mortgage balance stands at $300,000. With those numbers, your current home equity equals $200,000. If the lender only allows you to borrow up to 80% of the home's total value, that would mean your maximum combined debt can reach $400,000. Since you already owe $300,000 on your first mortgage, you could only borrow $100,000 through a HELOC.
Take the time to run these numbers carefully for your specific situation. You can determine how much you can potentially borrow and whether that amount will adequately suit your financial needs. If the accessible amount falls short of your goals, you'll need to either adjust your plans or explore alternative financing options.
According to Rate.com's analysis, lenders usually require homeowners to have at least 15% to 20% equity in their property before they'll issue a HELOC. Most lenders cap HELOCs at 80% of total home equity, adding another layer of risk protection for the lender.
The right lender can make all the difference in your HELOC experience and costs. Some lenders are genuinely willing to work with borrowers who have challenged credit. Others maintain strict underwriting standards and won't accommodate borrowers below specific credit thresholds.
Beyond simply finding a lender willing to work with you, it's extremely helpful to explore the different interest rates and fee structures available across multiple lenders. Locking in even a slightly lower interest rate, perhaps 0.25% to 0.5% less, can make a substantial difference to your finances over a 10 to 20 year HELOC term. It's absolutely worth the effort to shop around and compare at least three to five lenders.
According to Island Federal Credit Union's guidance, promotional rates, more streamlined application processes, and innovative offers are becoming increasingly common with HELOCs in 2025 due to increased demand and lender competition. This competitive environment benefits borrowers willing to shop around.
A HELOC is classified as a type of second mortgage, which means you'll encounter a lengthy list of paperwork requirements during the application process. You can make things considerably smoother for yourself by pulling together all necessary documents in advance of starting your application.
Be prepared to provide comprehensive documentation including full legal name, Social Security number, date of birth, government-issued photo ID like driver's license or passport, most recent paystubs covering at least 30 days, complete tax returns for the last two years including all schedules, recent bank statements from all accounts for the past two months, recent real estate appraisal or broker price opinion, current homeowners insurance policy declarations page, and complete mortgage statements showing current balance and payment history.
After choosing the lender that offers the best combination of rates, fees, and service for your situation and gathering all required documents, it's time to submit your HELOC application. Be mentally prepared to go back and forth with the lender a bit during underwriting. For example, the lender might require additional information about your income sources, request updated paystubs if time has passed, or require a new appraisal for your home if your existing valuation is outdated.
As you sort through the ongoing paperwork requirements, responding quickly to any lender questions can make the process go more smoothly and prevent unnecessary delays. Most lenders can complete HELOC approval and funding within two to four weeks if you provide all requested information promptly.
Once approved, use your HELOC responsibly to avoid jeopardizing your home. Make every single payment on time without exception, even during the interest-only draw period. Keep your outstanding balance reasonable relative to your credit limit, ideally below 30% utilization. Only borrow what you genuinely need rather than maximizing your available credit. And develop a clear repayment plan before the repayment period begins and payments increase substantially.
Every significant financial decision involves both advantages and disadvantages that deserve careful consideration. Let me walk you through both sides of getting a HELOC with bad credit so you can make an informed choice.
Some genuine pros of getting a HELOC include several valuable features.
Flexible use of funds for virtually any purpose. A HELOC offers a highly flexible way to tap into your home equity on an as-needed basis rather than taking a large lump sum upfront. If you need to cover ongoing costs over an extended period, like a multi-phase renovation or college tuition payments, the flexibility can help you avoid unnecessary borrowing and interest costs.
Flexible repayment terms during the draw period. The initial period of a HELOC often involves interest-only repayment options, which can give you meaningfully more room in your monthly budget during the draw period. This flexibility helps if your income fluctuates or you're managing other major expenses simultaneously.
Potential tax-deductible interest under specific circumstances. If you use your HELOC funds to cover certain qualifying expenses outlined by the Internal Revenue Service, specifically substantial home improvements that increase your property's value, you can potentially write off your interest payments on your tax return. Consult with a tax professional to understand how this applies to your situation.
Opportunity for credit score growth through responsible use. If you commit to making on-time payments to your HELOC without exception and keep your utilization ratio reasonable, you could eventually see a higher credit score over time. This credit building aspect can help you qualify for better rates when you refinance or apply for other credit in the future.
Of course, there are also some meaningful disadvantages to taking out a HELOC with poor credit that deserve serious consideration.
Significant risk of losing your home to foreclosure. When you use your home as collateral for a HELOC, you risk losing the house through foreclosure proceedings if you cannot keep up with your payment obligations. This represents the most serious risk of home equity borrowing.
Higher variable interest rates that can increase unexpectedly. When compared to other financing options, HELOCs typically come with variable interest rates that adjust based on prime rate movements. A changing interest rate can be difficult to fit into your budget, and rates could potentially rise substantially if economic conditions change.
Additional debt obligation to manage long-term. If you take on a HELOC, you're adding another significant debt to your balance sheet beyond your first mortgage. For most homeowners, this puts meaningful pressure on your budget for the long term and reduces your financial flexibility.
Risk of overborrowing due to convenient access. The convenience of a HELOC allows you to tap into available funds at any time through checks or a linked debit card. While this provides helpful flexibility for some borrowers, it can mean dangerous overborrowing if you aren't extremely disciplined.
A HELOC isn't the right financing solution for everyone's situation. The good news is that you have several other options if you need to borrow money with bad credit. Consider these alternatives carefully.
Home equity loan with fixed rate and predictable payments. A home equity loan involves taking out a lump sum loan and using your home as collateral, similar to a HELOC. The fixed monthly payments and stable interest rate could be a better solution for those looking for a truly budget-friendly option with no payment surprises.
Cash-out refinance combining first mortgage and equity access. If you qualify for a cash-out refinance, you can stick to a single mortgage payment rather than managing both a first mortgage and a HELOC. But you'll still get access to your home equity funds through a one-time cash payment at closing. This works best if current mortgage rates are similar to or lower than your existing rate.
Personal loan without collateral requirement. An unsecured personal loan doesn't require any collateral, which means your home won't be at risk if you cannot keep up with the payment schedule. For many borrowers, eliminating collateral risk makes a personal loan worth pursuing despite higher interest rates.
Credit card with promotional interest rate. Credit cards offer another unsecured borrowing option with no collateral requirement. Most credit cards come with high interest rates that could create serious debt problems. But if you can find a low interest rate option or promotional 0% APR period and commit to paying off the balance during the promotion, a credit card could be the right solution for your spending needs.
Loan from family and friends with clear terms. If you have family members or friends willing to offer you a loan with a better interest rate than commercial lenders, that's an opportunity worth considering carefully. But make absolutely sure to get everything in writing including repayment terms, interest rate if any, payment schedule, and consequences for missed payments to avoid putting unnecessary strain on important relationships.
Home equity financing options can help you tap into the substantial equity funds you need for important goals. In general, it's genuinely worthwhile to spend some focused time improving your credit score before submitting your loan application. The potential savings from better rates easily justify a six to twelve month delay in most circumstances.
But don't forget to carefully consider alternative financing options to determine if a home equity line of credit or similar loan type truly represents the best solution for your specific situation. Sometimes other options like home equity loans, cash-out refinancing, or even unsecured personal loans make more sense depending on your needs and financial profile.
If you decide you're ready to move forward with home equity financing, AmeriSave offers conventional loans, FHA loans, and VA loans that can help you purchase or refinance properties. While we don't currently offer HELOCs, our mortgage specialists can discuss home equity loan options and help you understand which financing approaches make the most sense for your real estate and financial goals.
Most lenders want you to have a credit score of at least 620 to 680 in order to get a HELOC. The exact number varies from lender to lender. Experian says that most mainstream lenders will only give a HELOC to people with a FICO score of at least 680. However, some lenders are more flexible and will accept scores as low as 620. For the best rates and terms, lenders may want credit scores of 720 or higher.
RefiGuide's research shows that big banks and other lenders offer rates as low as 6.99% APR to borrowers with good credit scores (740 or higher). However, borrowers with scores below 620 may have to pay rates of 9% or more. The extra 2% on a $50,000 HELOC costs about $1,000 more in interest each year.
It is very hard to get a HELOC from a traditional lender if your credit score is 580. But hard money lenders might be able to help you get a HELOC or an equity-based credit line that is based more on the value of your property than your credit score. A lot of the time, these other options let you have a credit score as low as 500 or even no score at all. But the interest rates are much higher, usually in the double digits, and the repayment terms are much shorter, usually one to three years.
Most important credit improvements take six to twelve months of consistently good behavior. For six months, paying all your bills on time shows lenders that you are responsible. If you pay off your credit card balances to less than 30% of their limit, your scores may go up in one to two billing cycles. Once you dispute and get rid of false negative items, your scores can go up in 30 to 60 days.
Market research shows that the standard DTI cutoff for HELOCs will still be around 43% in 2025. However, lower ratios always make it more likely that you will be approved and get better rates. Most lenders will accept your 40% debt-to-income ratio if your total monthly debts are $4,000 and your monthly income before taxes is $10,000.
Yes, HELOC rates should keep going down slowly throughout 2026 as the Federal Reserve keeps cutting rates. Since September 2024, the federal funds rate has been slowly going down, and more cuts are expected in 2026. Rates are not likely to go back to the very low levels they were at during the pandemic.
Yes, most of the time. If you wait six to twelve months to raise your credit score from 640 to 680 or higher, you could save thousands of dollars in interest and have many more lenders to choose from. But if you have real financial emergencies that can't wait, you may need to look into HELOC options with your current credit, even though they cost more.
Fact Checked
