Applying for a home equity loan or home equity line of credit (HELOC) can be an effective way to borrow money to finance a home renovation project or pay for other big expenses.
Your credit score is one of the key factors lenders consider when deciding if you qualify for a home equity loan or HELOC. A FICO® Score* of at least 680 is typically required to qualify for a home equity loan or HELOC. (For help with choosing between a home equity loan or HELOC, see here.)
What Credit Score Do I Need to Get a Home Equity Loan or HELOC?
Your credit score is an important factor in qualifying for a home equity loan or HELOC. A FICO® Score of at least 700 gives you the best shot at qualifying for a home equity loan or line with good terms.
You may be able to qualify for a home equity loan or HELOC with a score between 660 and 700, but you will be charged a higher interest rate, and lenders may require that other financial factors—such as your overall debt—are in extra good shape.
Can I Get a Home Equity Loan with a Low Credit Score?
Lenders look at a variety of factors when deciding if you qualify for a home equity loan. If your credit score is below 700, qualifying for a home equity loan may require you to shine in other areas, such as your debt-to-income ratio (DTI), or the amount of equity you have.
Your DTI ratio measures your total monthly debt payments, calculated as a percentage of your gross pay. Typically, lenders want your DTI ratio—including the home equity loan—to be no more than 40% to 43% of your monthly gross income. If you have a low credit score, a low DTI can help give a lender more confidence to make the loan.
Another way to reduce a lender's concern about a lower credit score is the amount of equity you have in the home. Your equity is the appraised value of your home minus the remaining balance on your mortgage. Generally, having at least 20% equity is required to qualify for a home equity loan. But if you have a credit score below 700, a higher equity stake may help you qualify.
A higher amount of equity reduces a lender's risk. With sizable equity, you have extra motivation to stay on top of your home payments. But if you were ever to be unable to handle your repayments, a lender would have the right to foreclose and sell the property, and even after paying your mortgage, there would likely still be enough proceeds to cover your outstanding home equity loan or line balance.
Will My Credit Score Impact the Interest Rate On My Home Equity Loan?
Home equity loans are fixed-rate loans that are typically repaid in five to 10 years. A HELOC is typically a variable rate line of credit that can be drawn on for 10 years, at which point repayment must begin. In both instances, your credit score will impact the interest rate. The higher your credit score, the lower the fixed rate you will be offered on a home equity loan, and the lower the initial rate on a HELOC.
If you have a credit score below 700, you can take steps to improve your credit score before you apply for a home equity line or HELOC. On-time bill payment, along with paying down debts, such as an auto loan, can help you raise your credit scores.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on November 1, 2018, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.