A home equity line of credit can help you gain access to the equity you built up in your home. Unlike your first mortgage, the requirements for the HELOC are a bit more relaxed. In fact, even if you have a low credit score, there are ways for you to obtain approval for this equity loan. You have to know what lenders expect and what you can do to maximize your chances of securing approval for a HELOC.
Check Your Credit
The first step is to determine how low your credit score is right now. If you request your free credit report from any of the three credit bureaus, you will not see a credit score, but can see the credit history. This at least lets you see what went wrong. Did you make payments late? Do you have outstanding debts that never got paid? What are your credit utilization rates like? Do you have too much credit outstanding in comparison to your available credit? Each of these things can hurt your credit score.
Once you know what reports on your credit history, you can start fixing it. Take care of old debt, pay off some outstanding debt, and make your payments on time. If you cannot do any of these things right now, at the very least, you know what the lender will want to talk about. Have your reasons ready for the negative credit history. You might be surprised to find out the lender can still help you with a HELOC despite your scores. This is especially true if you plan to use the funds to pay off your old debts or high credit card balances.
Gather Compensating Factors
Your credit score is not the only factor lenders care about with a HELOC. They want to see stable employment and income, as well as liquid assets and equity in the home. If you want to make up for a low credit score, figure out how you can compensate. Have you held the same job for many years? Has your income increased in the last year or two? Do you have a large amount of equity in your home? These compensating factors can help you secure approval for the HELOC. Show the lender the positive aspects of your application, rather than focusing on the negative. If you show stable income, for example, this shows the lender that your income does not fluctuate and as long as your debt ratio is in line, you should be able to afford a new loan.
Minimize the Equity you Tap Into
If you need to tap into the equity of your home, don’t go all out and ask for the entire amount. Let’s say you owe 70% of the value of your property in your first mortgage. This leaves you with 30% equity. If you need a few thousand dollars to make some repairs on your home, for example, ask for a HELOC that amounts to around 10% of the equity in your home. This leaves 20% alone, which serves as collateral to the lender. This helps them feel better about loaning you the money despite your low credit score. The higher your LTV, the less chances you have of obtaining loan approval.
Shop Around for a Lender Who Allows a Low Credit Score
There are thousands of lenders who offer home equity loans and many of them allow a low credit score. Avoid sticking with the well-known branches and veer off into the private lenders. These are the banks that are more willing to offer a HELOC to people with lower than average credit. Every lender has their own requirements, though, so make sure you shop around to see which one offers the deal you need.
Care should be exercised when you have a low credit score, though. Some lenders make try to take advantage of the situation. They do so by charging excessive fees or excessively high interest rates. For the most part, this exercise has stopped, but getting quotes from several lenders can help you to determine the average rates and costs for someone in your situation. It also helps you to find the loan, which will be the most affordable for you in the end.
It is not impossible to obtain a home equity line of credit with a low credit score. You may have some work ahead of you, though. The first line of business is to make your application as attractive as possible. Don’t assume you will find a lender who will accept your low score. Instead, beef up the score if you can or get your compensating factors in line. In addition, make sure you have a plausible explanation for the derogatory credit or low score so the lender can understand the full implication of lending to you. If you have a low score because of a one-time event, such as a sudden illness or injury, let him know what happened. Lenders are capable of looking at loan applications with realistic expectations. They understand that things happen and people suffer bad credit scores as a result. It does not mean that you will never secure a HELOC again – you just have to put the work in to get it.