Choosing between a home equity loan and HELOC with low credit depends on your financial needs and credit profile. Home equity loans are often easier to qualify for with poor credit, offering fixed rates and predictable payments, while HELOCs typically require higher scores and carry variable rates. This guide explores key differences, lender criteria, and strategies to boost approval odds—helping borrowers make informed decisions when accessing equity with less-than-perfect credit.
What’s the Best Option If You Have Low Credit?
If your credit score is below 650, a home equity loan is generally easier to qualify for than a HELOC. It offers fixed payments and greater predictability, making it ideal for borrowers with financial constraints or budgeting needs. A HELOC, while more flexible, usually requires a higher credit score and may come with variable interest rates that can increase over time.
Understanding the Basics: Home Equity Loan vs. HELOC
Both a home equity loan and a HELOC let you borrow against the equity in your home—the portion you’ve already paid off through your mortgage. But they work differently:
Home Equity Loan (Second Mortgage)
- Disbursed as a lump sum
- Fixed interest rate
- Predictable monthly payments
- Ideal for large, one-time expenses like debt consolidation or major renovations
HELOC (Home Equity Line of Credit)
- Works like a credit card tied to your home’s value
- Variable interest rate
- Borrow as needed, up to a limit
- Ideal for ongoing or uncertain expenses like phased home improvements or business funding
Why Credit Score Matters More Than You Think
Your credit score significantly impacts your loan approval odds, interest rates, and borrowing limits.
Credit Score Range |
Loan Approval Odds |
| 740+ | Excellent – Best rates and terms |
| 680–739 | Good – Likely to qualify |
| 620–679 | Fair – May qualify with higher interest |
| <620 | Poor – Limited options, higher risk |
With a low credit score (under 650), your financing options narrow significantly—especially for variable-rate credit products like HELOCs.
5 Key Factors Lenders Consider for Low Credit Borrowers
Even if your credit score is less than ideal, lenders will assess other factors when you apply for a home equity product:
- Loan-to-Value (LTV) Ratio – You’ll typically need at least 15–20% equity in your home.
- Debt-to-Income (DTI) Ratio – Lenders prefer a DTI under 43%.
- Employment History – A stable job history can offset credit issues.
- Income Level – Higher income can reduce perceived risk.
- Payment History – Recent missed payments weigh more heavily than older delinquencies.
Pros and Cons: Home Equity Loan vs. HELOC With Low Credit
Let’s break down the key benefits and drawbacks of each option for borrowers with credit challenges:
Home Equity Loan Advantages:
- Fixed payments make budgeting predictable
- Easier to qualify with fair or low credit
- One-time disbursement prevents overborrowing
- Interest may be tax-deductible if used for home improvement (consult a tax advisor)
Home Equity Loan Disadvantages:
- Less flexible—funds come in a lump sum whether you need them all or not
- May carry higher interest rates for low credit borrowers
- You begin repaying immediately
HELOC Advantages:
- Borrow as needed, not all at once
- Only pay interest on what you use
- Potentially lower initial interest rates
HELOC Disadvantages:
- Variable rates can rise quickly, increasing your monthly payments
Harder to qualify with poor credit - Draw period ends—repayment period begins with higher required payments
- Risk of accumulating debt with flexible access
Which Option Is Better for Low Credit? A Side-by-Side Comparison
Feature |
Home Equity Loan |
HELOC |
|
Credit Score Requirement |
580–620 (some lenders) | Typically 660+ |
| Interest Rate Type | Fixed | Variable |
| Payout Method | Lump Sum | Revolving Credit Line |
| Monthly Payment Structure | Fixed | Varies Based on Usage & Rate |
| Risk of Payment Shock | Low | High (due to rate increases) |
| Best for | One-time large expenses | Ongoing or phased expenses |
| Approval Flexibility | Higher for low credit borrowers | More restrictive for poor credit |
Real-World Example: Maria’s Decision With a 615 Credit Score
Maria owns a home in Ohio valued at $250,000, with $150,000 remaining on her mortgage. She has $100,000 in home equity but a credit score of 615 due to past medical debt. She needs $30,000 for home renovations and is debating between a home equity loan and a HELOC.
After Comparing:
- Home Equity Loan: She qualifies with a credit union offering fixed terms at 9% interest over 15 years.
- HELOC: Denied by multiple lenders due to her credit and debt ratio.
Result: Maria opts for the home equity loan. It has higher interest than someone with good credit, but it gives her the funds she needs, with fixed payments she can manage.
How to Get Approved With Low Credit: 5 Practical Steps
Even with bad credit, you can improve your odds by following these strategic steps:
1. Improve Your Credit Score
- Pay off small balances
- Correct errors on your credit report
- Avoid applying for multiple credit lines at once
2. Increase Your Home Equity
- Make extra mortgage payments
- Wait for property values to rise before applying
3. Choose the Right Lender
- Credit unions and online lenders are often more flexible
- Look for lenders that offer home equity loans for bad credit
4. Consider a Co-Signer
- A trusted family member or partner with good credit can help secure better terms
5. Limit the Amount You Borrow
- Request less than 80% of your available equity to reduce risk for the lender
FAQs
Can I get a home equity loan with a 600 credit score?
Yes, some lenders will approve you if you have strong equity and a manageable DTI ratio. However, expect a higher interest rate.
Is it easier to qualify for a home equity loan than a HELOC with low credit?
In most cases, yes. HELOCs usually require stronger credit due to their revolving structure and variable rates.
Will applying for a home equity product hurt my credit?
Yes, applying triggers a hard inquiry. But the long-term impact is minor if you manage the loan well and make payments on time.
What happens if I can’t repay my home equity loan or HELOC?
Because both are secured by your home, defaulting can lead to foreclosure. Always borrow responsibly and understand your repayment terms.
Final Thoughts
If you’re weighing a home equity loan vs. a HELOC with low credit, the safest and most accessible option is often a home equity loan. Its fixed terms and simpler structure make it easier to manage—especially when you’re working to rebuild your credit. However, it’s essential to shop around, understand lender requirements, and assess your budget before making a decision.