Best HELOC Lenders for Bad Credit
April 2024
Bad credit can make it a challenge to get a HELOC, even if you have built a lot of equity in your home. These are the best HELOC lenders for homeowners with poor credit.
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Having bad credit makes it harder to qualify for a home equity line of credit, but it's not impossible. Depending on the lender and other considerations, you can get approved for a HELOC even with bumpy credit history.
Here is SuperMoney's list of the best HELOC lenders for bad credit.
How to qualify for a HELOC with bad credit
There's no question that poor credit will make it harder to get a HELOC, even if you have managed to build a lot of equity in your home. However, there are things you can do to qualify for a HELOC, even if you have a bumpy credit history.
Here's the short version on what you can do to improve your chances of getting a HELOC when you have bad credit.
- Lower your debt-to-income ratio.
- Reduce your loan-to-value ratio.
- Compare multiple lenders.
- Consider HELOC alternatives.
A poor credit score signals you as a higher than average risk to lenders. You can improve your credit risk perception by working on the other factors that lenders consider when evaluating a credit application. The most important ratios are your debt-to-income ratio and your loan-to-value ratio. Let's dig a little deeper into those numbers.
Lower your debt-to-income ratio
Studies suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. Your debt-to-income ratio is the result of dividing your monthly debt payments by your gross monthly income. Lenders use this ratio to calculate your ability to make monthly payments on a new loan or line of credit. Many HELOC lenders only consider homeowners who have a debt-to-income ratio of 43% or lower. HELOCs and home equity loans are the home equity financing options with the most stringent debt-to-income requirements.
You can lower your debt-to-income ratio by paying off as much debt as possible and not taking on more debt.
Reduce your loan to value ratio
The loan-to-value (LTV) ratio is a measure that compares how much you owe on a property with its appraised value. You can calculate your LTV by dividing your current debt balance by the home's appraised value and multiplying by 100 to make the number a percentage. For example, a home with a fair market value of $200K and a $100K mortgage has a loan-to-value ratio of 0.5 ($100K/$200K) or 50%. A low LTV will improve your chances of qualifying for a HELOC with competitive terms.
You can reduce your loan-to-value ratio by increasing the value of your property through home improvements or repairs and by making extra payments on your mortgage.
Compare multiple HELOC lenders
Lenders look at different factors when considering HELOC applications. Some lenders will only consider borrowers who have good credit. Others are more flexible if your loan-to-value and debt-to-income ratios look good because at the end of the day your home secures the line of credit. So, don't be discouraged in one HELOC lender denies your application. You can still get approved for a HELOC even if you have less than perfect credit.
HELOC alternatives
Home equity lines of credit and home equity loans are, on average, the home equity financing options with the highest minimum credit score requirements. There are exceptions (see the list above), but most HELOC lenders will only consider borrowers with a credit score above 680. Notice that although it is possible to get approved for a HELOC with bad credit, it might not be the best financial option for you.
So, if you are not getting approved for a HELOC or you only qualify for high interest rates, you may want to consider other home equity financing products, such as shared equity agreements or cash-out mortgage refinancing.
Sell a share of your equity
Getting a shared equity agreement is probably the easiest option for homeowners with bad credit. However, it's very possible that you have never heard of them, since they are a relatively new type of home equity financing. Some shared equity investors will consider homeowners with credit scores as low as 500 and most don't care that much about your debt-to-income or loan-to-value ratios.
The best thing about shared equity agreements is they don't require getting into debt or making monthly payments. This is because instead of borrowing money you're actually selling a slice of the future equity of your home. When your home is sold (or when the contract term ends), the investors receive their share from the sale. If the value of the house increases, so does the amount the investor receives. If the house drops in value, the investor also shares in the loss.
Cash-out with a mortgage refinance
A cash-out mortgage refinance replaces your current mortgage with new terms, a new interest rate, and a larger loan balance. Refinance loans are usually easier to qualify for than HELOCs because they have a first lien claim on your home, which means less risk for lenders. It varies by lender, but typically mortgage refinancing is available to borrowers with credit scores as low as 620 and a debt-to-income ratio of up to 50%.
A cash-out mortgage refinance can help you get back on track financially, but it can also increase the cost of your entire mortgage if you refinance with a higher interest than your current mortgage. In general, cash-out refinancing is best avoided unless you can qualify for a lower (or the same) interest rate.
Sale-Leaseback Agreements
Another option is to sell your home and collect all your equity. This is not an attractive option for people who don't want to move or want some time to buy a house before they do. In such cases, a sale-leaseback agreement may be a good fit.
What is a sale-leaseback agreement?
A sale-leaseback agreement, often just referred to as a "sale-leaseback", is a financial transaction in which a homeowner sells their property to an investor or company and then immediately leases it back. This allows the homeowner to access the equity they've built up in their home without moving out or taking on a traditional mortgage. Instead, they continue living in the home, paying rent to the new owner.
How Sale-Leaseback Agreements Work
In a typical sale-leaseback agreement, the property is sold at its current market value. The terms of the lease, including the duration and monthly rent amount, are agreed upon at the outset. The lease often resembles a standard rental agreement, but it's essential to carefully review any terms related to rent increases, lease renewals, and potential buy-back options.
Is a Sale-Leaseback Right for You?
Deciding on a sale-leaseback requires careful consideration. Homeowners should weigh the immediate financial benefits against the long-term implications of becoming a tenant in what used to be their property. It's also crucial to work with a trusted legal professional to ensure the agreement is fair and transparent.
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