What is the Minimum Credit Score for a Home Equity Loan?

If you’re considering taking out a home equity loan or HELOC (home equity line of credit), one of the key qualifying factors is your credit score. Most lenders have minimum credit score requirements borrowers must meet to get approved

In this comprehensive guide we’ll explain what credit scores are typically needed to qualify for a home equity loan or HELOC. We’ll also provide tips for borrowers who fall short of ideal credit score ranges.

Overview of Home Equity Loans and HELOCs

Before diving into credit score specifics let’s quickly recap how home equity loans and HELOCs work

• Home equity loan – You receive funds in a lump sum that you repay with fixed monthly payments over a set repayment term. Your home serves as collateral.

• HELOC – You’re approved for a revolving credit line up to a set limit. You can access funds as needed and make monthly payments on the balance. Your home is used as collateral.

Both loan types allow you to leverage home equity. They involve borrowing against the current value of your home minus what you owe on your mortgage.

Now let’s explore typical credit score requirements.

What is the Minimum Credit Score for a Home Equity Loan?

For a home equity loan, here are the usual minimum credit score requirements from lenders:

• Minimum score: 620 FICO
• Competitive score: 700+ FICO

So while you may only need a 620 credit score to qualify, you’ll get better rates and terms at 700 or higher.

With good credit of 720+ FICO, you can expect to qualify for the lowest home equity loan rates. The higher your score, the better deal you can expect to receive.

What is the Minimum Credit Score for a HELOC?

HELOCs tend to have slightly higher minimum credit score thresholds than home equity loans:

• Minimum score: 650 FICO
• Competitive score: 700+ FICO

So you may need a score of at least 650 FICO to qualify for a HELOC. But 700+ is ideal for the most favorable rates and terms.

As with home equity loans, borrowers with excellent credit in the 720+ FICO range will qualify for the lowest HELOC rates and costs. The higher your score, the better.

What Impacts Your Chances with Lower Credit Scores?

If your credit score falls a bit below conventional minimums for home equity loans or HELOCs, you still have a chance of qualifying if you offset it with other positive factors:

• Higher income – Compensates for higher credit risk
• Lower debt-to-income ratio – Shows you manage debts responsibly
• More home equity – Provides more collateral for the lender

While boosting income or home equity isn’t easy, reducing debts can quickly lower your DTI and strengthen your application. Paying down credit cards, auto loans, student loans, or other debts improves your debt profile.

Tips to Qualify for a Home Equity Loan with Bad Credit

Here are some top tips for getting approved for a home equity loan if you have poor credit:

• Shop with subprime lenders specializing in bad credit borrowers
• Provide proof of steady income to show repayment ability
• Pay down debts to reduce your debt-to-income ratio
• Build extra home equity by making extra mortgage payments
• Add a co-signer with good credit to strengthen your application
• Offer your lender collateral or security in addition to your home
• Accept a shorter repayment term to reduce lender risk

While bad credit makes approval harder, taking strategic steps can help offset your credit challenges.

How to Improve Your Credit Score for a Home Equity Loan

If your credit score needs a boost before applying for a home equity loan or HELOC, here are some tips:

• Pay bills on time – Payment history is very influential on your scores.
• Pay down balances – Lower credit utilization helps.
• Dispute errors – Fix any mistakes dragging your score down.
• Avoid new credit – New accounts can lower average account age.
• Monitor your credit – Review reports regularly for changes.

With some diligence, you may be able to improve your credit score enough in a few months to qualify for a better home equity loan or HELOC.

The Impact of Credit Scores on Home Equity Loan Terms

The benefits of a higher credit score when applying for a home equity loan go beyond just improving your odds of approval. Your credit score also influences other key factors:

• Interest rate – The higher your credit score, the lower rate you’ll qualify for. An excellent credit score can save you thousands in interest costs over the loan repayment period.

• Loan amount – Borrowers with higher credit tend to qualify for larger home equity loan amounts relative to their total home equity.

• Fees – Lenders often waive origination or other fees for borrowers with exceptional credit scores to win their business.

• Loan term – A longer repayment term reduces lender risk. Better credit means qualifying for longer terms up to 30 years.

So your credit score affects more than just getting approved. The higher your score, the better deal you can expect from lenders.

Average Home Equity Loan Rates by Credit Score

To give a sense of the interest rate impact, here are typical average home equity loan rates currently offered to borrowers based on credit score tiers:

As you can see, just a 60 point difference in scores from 680 up to 740 can save over 2.5% on your interest rate. Focusing on improving your credit before applying can really pay off.

When Credit Score Overrides Home Equity Requirements

An interesting scenario is when your high credit score allows you to qualify for a home equity loan even with less than the normally required minimum home equity.

For instance, most lenders want you to have at least 15-20% equity to qualify for a home equity loan. But some lenders may approve loans with as little as 10% equity if you have a very strong credit profile that offsets the additional risk.

So in some cases, an exceptionally high credit score can override standard home equity requirements. But you’ll likely pay a higher interest rate due to the added risk.

Partnering with an Experienced Lender

Navigating home equity loan requirements can be confusing. Working with an experienced loan officer simplifies the process.

They can review your specific financial situation and credit profile and match you with lending partners most likely to approve your application on favorable terms.

Connecting with a knowledgeable home equity lending expert is the best way to save time and find the ideal loan program for your needs. They can guide you through every step of the application process so you can leverage your home equity with confidence.

The Bottom Line

When applying for a home equity loan or HELOC, your credit score is a key factor lenders consider to qualify you and determine your loan terms. While minimum scores are often around 620-650 FICO, you should aim for 700+ for the best offers.

The higher your credit score, the better your chances of approval and the lower your interest rate. Take time to boost your credit before applying and partner with an expert lender to ensure you get the ideal home equity loan for your financial situation.