Does Your Credit Score Matter When Applying for a HELOC?

Financing a big purchase can be an absolute nightmare, if not impossible, for those with poor credit. Even if you’re currently in a good place financially, lenders will look to your past to determine if they want to extend you a loan. A HELOC can provide those with less-than-perfect (or even subpar) credit with a way to acquire needed funding.

But how much does your credit score matter when applying for a HELOC?

What Is a HELOC?

Those who are in the process of looking for ways to borrow money might have come across HELOC, which stands for a home equity line of credit. These are interesting loans that have some unique pros and cons. They can be a saving grace for individuals in dire need of securing funds.

The essence of a HELOC is that borrowers can leverage equity in their home by using it as collateral to acquire another loan. In other words, even if you don’t own your home outright, it’s possible to use your level of equity in it to obtain further financing, as the loan is secured by your home.

This can be a hugely beneficial option for those who really need to borrow money, but are unable to do so with reasonable terms otherwise. Obtaining a HELOC with bad credit can be a game-changer for many who are having a tough time getting another type of loan. Since a HELOC is secured by what’s likely your most valuable asset, lenders will be more likely to work with you and offer more competitive rates than you might receive from other options.

At the same time, you’re literally putting your home on the line when doing this, which makes repayment extremely critical. If you don’t repay this debt, there’s a high likelihood of you losing your home. Therefore, you really understand the nuances of a HELOC before making any decisions.

Does Your Credit Score Matter When Applying for a HELOC?

One of the biggest HELOC tips is to know how your credit score is going to affect your ability to secure a line of credit. While a HELOC is going to be more forgiving of poor credit than other types of financing arrangements, your credit score still factors into the lending decision.

In it’s most basic terms, a credit score is simply a reference point for lenders to determine the likelihood of repayment if they extend you a loan. Of course, credit scores aren’t a perfect science. You might actually be in a place where you’re more likely to repay than what’s implied by your score. But the opposite can also be the truth.

You have to think about credit scores from the perspective the lender more than your own. Lenders don’t have any knowledge of you as a person beyond your credit history. They have to protect themselves by avoiding loans that incur too much risk for too little reward.

If you have a lower score, it decreases your likelihood of being approved for a HELOC. Furthermore, if you don’t have great credit but are approved for a HELOC, you’re not going to get as good of an interest rate as you would with good credit. If you’re in this situation, you especially need to be cautious and feel confident in your ability to understand and repay the HELOC. As already mentioned, your home is on the line.

If you have some flexibility in receiving funds, it’s a good idea to boost your credit score before applying for a HELOC. Your debt-to-income ratio also plays a role in this equation; so boosting income or lowering debt will make you look better to lenders. Doing these things first can ensure you end up with a HELOC that you don’t get over your head with debt and end up in trouble. While there are debt relief services that might be able to help you down the line, avoiding these situations is always going to be better for you.

Your credit score might seem like a boring thing. But when it matters, it really matters a lot. Knowing how your credit score will affect your ability to secure a HELOC can help you determine your best path forward in obtaining funds with subpar credit.

Huynh Nguyen

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