Getting a HELOC with a 650 credit score, while not ideal, does not typically exclude you from getting a loan. A home equity line of credit (HELOC) allows qualified homeowners to borrow up to 80 percent of their home’s market value, and they may have up to 20 years to repay it.
During the initial draw period, you can withdraw up to your credit limit from your HELOC, with only minimum interest payments required. Most draw periods range from five to 15 years.
During the repayment period, though, homeowners must repay the amount they borrowed. Repayment periods are typically between 10 to 20 years.
What Determines the Amount of a HELOC?
When homeowners apply for a HELOC, lenders consider two factors: the current value of the home (Loan-to-Value) and the homeowner’s credit score.
Loan-to-Value
The Loan-to-Value (LTV) percentage is a calculation that determines how much a homeowner owes on their mortgage compared to the property’s market value. It takes into account the amount you still owe on your mortgage, the amount of the loan you’re interested in, and the appraised value of your home. For example, if you received a loan for $300,000 from a mortgage lender and still owe $200,000, that might be considered a high LTV by some lenders and reduce the amount you could borrow with a HELOC.
However, if you paid $300,000 for your house and still owe $200,000 on the loan, but your home value has appreciated $150,000, it could lower the LTV percentage. Most lenders have a maximum LTV limit they’ll accept when approving HELOCs. If your LTV is too high, you might not get approved for a HELOC, but you may qualify for a smaller credit limit with a higher interest rate.
Calculating LTV Here is an example of how to calculate LTV:
A property’s appraised value ($200,000) at the time of the sale divided by the amount borrowed ($150,000):
$200,000 ÷ $150,000 = 75
(The buyer made a down payment of $50,000, which reduced the amount they needed to borrow).
The LTV ratio is 75 percent. LTV ratios under 80 percent are considered acceptable to many lenders.
Benefits of RenoFi Loans
While a traditional HELOC may be a viable option to finance a home renovation for some, it often doesn’t offer the borrowing power required to tackle your entire wishlist. That’s because traditional home equity loans are based on the current value of your home, so they only work if you’ve owned your home for a long time and have built enough equity. RenoFi loans, on the other hand, are based on the after renovation value of your home, which increases the tappable equity and consequently your borrowing power.
For example, imagine your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000.
Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value.
So in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 thanks to the after renovation value of your home!
If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.
Can Homeowners Get a HELOC With 650 Credit Score?
HELOCs differ from FHA or conforming loans because they aren’t regulated by the Federal Housing Administration or the Federal Housing Finance Agency. Lenders can establish their own qualifying guidelines that do not need to comply with FHA or FHFA regulations.
A 650 credit score should not prevent a homeowner from finding a lender who will approve their HELOC application. Lenders consider other factors when deciding whether to approve a HELOC.
FICO Credit Score
Lenders often rely on credit scores developed by the Fair Isaac Corporation (FICO). “Exceptional” FICO credit scores range from 800 to 850. “Very good” FICO scores range from 740 to 799. “Good” FICO scores range from 670 to 739. “Fair” FICO scores range from 580 to 669.
A FICO credit score of 650 is in the fair range, but lenders will consider an applicant’s LTV, employment history, proof of a steady income, and debt-to-income ratio in addition to this score.
Debt-to-Income Ratio
Your debt-to-income ratio tells lenders whether you can afford HELOC payments. To calculate debt-to-income ratios, add all your monthly debt payments and divide it by your monthly income.
Monthly debt payments include personal loans, mortgages, child support, credit cards, student loans, and car payments but do not include utilities, food, or medical expenses,
Example:
Total monthly debt payments: $1500
Monthly income (after taxes): $6000
Debt-to-income ratio: 25 percent ($6000/$1500)
Although lenders like to see debt-to-income ratios below 45 percent, some require lower ratios before approving a HELOC.
Interest Rates on HELOC With 650 Credit Score
HELOC interest rates are adjustable and generally follow the market. They may fluctuate, which can periodically lead to an increase or decrease in monthly payments.
Other factors affecting HELOC interest rates at the time of approval include equity, amount borrowed, and credit score.
Interest Payments
You can make interest payments during a HELOC’s draw period without incurring late penalties, but remember that unless you make more than a monthly interest payment in the draw period, you will have to repay the interest and principal during the repayment period. In other words, monthly HELOC payments will likely be higher in the repayment period if you only pay interest during the draw period.
Interest Rate Caps
Adjustable rates for HELOCs include a lifetime cap and a periodic cap. The lifetime cap has the highest interest rate impacting payments. The periodic cap refers to how frequently interest rates change over the terms of a HELOC loan.
For example, a three percent periodic cap means that the interest rate cannot increase by more than three percent during the adjustment period. Lifetime caps prevent interest rates from exceeding the prevailing interest rate by establishing a “cap.” If a HELOC has a lifetime cap of 10%, and the current interest rate rises above 10%, the HELOC lifetime cap remains at 10%.
Benefits of Interest Rate Caps for HELOCs
Rate caps protect homeowners from sudden interest rate increases and make monthly payments less unpredictable and more manageable.
What to Know About the HELOC Appraisal and Approval Process
Approaching an Appraisal
Receiving a HELOC with a 650 credit score is doable with organization and effort. When you apply for a HELOC, lenders may contact you to schedule an appraisal of your home. A professional appraiser will assess the following elements of your property:
- Cleanliness of the interior and exterior of the home
- Maintenance of lawn and landscaping
- Condition of the electrical and plumbing systems
- Condition of the roof, foundation, and general structure of the house
- Number of repairs (if any) needed
Providing receipts for recent upgrades is an excellent way to demonstrate to the appraiser that you practice proactive maintenance and will increase your chance of approval.
Submitting Documents to HELOC Lenders
Depending on your application, a lender may request documents before or after the appraisal. To streamline the process, have the following documents available (if applicable) to send to the HELOC lender:
- Proof of income (W-2s, recent pay stubs, employer contact information, federal and state tax returns)
- Bank statements
- Property deed
- Social Security and pension award letters
- Copy of your driver’s license or state ID
- Copy of home insurance policy
- Copy of most recent property tax bill
- Mortgage statements
Self-employed homeowners must submit at least two years of business and personal tax returns, personal and business bank statements, and profit/loss statements.
Getting Approved: How to Increase Your Credit Score Before Applying for a HELOC
Pay Off Credit Cards
The average credit card debt in the US is approximately $7000, and most people have three or more credit cards. If you have a 650 credit score and want to apply for a HELOC but have an outstanding balance exceeding $7000, you might need to work on raising your credit score. Paying off or paying down credit card balances will boost your credit score and help offset issues with your debt-to-ratio percentage.
Have Errors Removed on Your Credit Report
It’s not uncommon to find mistakes on a credit report. If you think a credit reporting agency has made an error on your credit report, don’t hesitate to call them and dispute it. Removing the error could increase your credit score by several points.
If you want to apply for a HELOC but don’t think you’ll be approved, start monitoring your credit score regularly over the next few months. Keep track of improvements, even if your score only improves by one or two points. Call the credit agency right away if you think you have found a discrepancy on your report to have the error corrected.
Talk to Creditors
Some creditors may remove late payment reports if you make accounts current and ask the creditor to delete them. Reach out to these lenders to see if there’s anything they can do to help you.
Read This Before Canceling Unused Credit Cards
It seems counterintuitive that canceling a rarely used or unused credit card can lower your credit score, but this can happen because the cancellation impacts your credit utilization ratio.
Credit utilization is how much of your total credit you are using. It’s calculated using the following formula:
Credit card balance/credit limit x 100 = credit utilization ratio
So, if your credit card balance is zero on the card you want to cancel, and your credit limit on that card is $2000, the equation would then be: 0 ÷ $2000 x 100 = 0.
However, if you have other credit cards carrying balances of $7000 collectively, then the equation would be $7000 ÷ $2000 x 100 = 35%.
The problem with canceling an unwanted credit card depends on whether you have other credit cards with outstanding balances. You may still qualify for a HELOC with a 650 credit score if your credit utilization rate is below 30% and you have a stable income and reasonable debt-to-income ratio.
Opening a HELOC May Boost Your Credit Score
Adds Diversity to Your Credit History
Paying your HELOC on time shows lenders that you can be trusted to manage different types of debt. Moving your credit score from fair to good to very good means lenders will give you more favorable terms and lower interest rates on other types of loans.
Reduces Credit Utilization Ratio
Opening a HELOC may lower this ratio by affecting your available credit. The more available credit you have, the better your credit utilization ratio looks to lenders.
Builds History of Making On-Time Payments
FICO determines credit scores by evaluating payment history for all debts, including mortgages, rent, utilities, personal loans, credit cards, and especially HELOCs. If you regularly make payments more than 30 days late, it will quickly erase points from your credit score.
Advantages of Getting a HELOC With 650 Credit Score
HELOCs Offer Flexibility and Convenience
If you secure a HELOC, you can borrow the exact amount you need to pay for home renovations, take a dream vacation, or pay off the remaining student loan balance. Instead of paying interest on a lump sum received from a personal loan, you can utilize a HELOC over a decade or more and borrow only what you need, when you need it.
Consolidate Debts
Nothing is more stressful than paying a dozen bills at the end of the month. Consolidating multiple, smaller debts into one payment with a HELOC can help ease a financial headache and get you started on improving your credit score.
Possible Tax Deductions on Interest
Changes to tax laws several years ago allow homeowners to apply tax deductions to interest paid on HELOC loans, but you can only take the deduction if you use funds to renovate your home. The IRS defines “renovate” as “buying, building, or substantially improving” a property.
You can also only spend HELOC funds on the property where the equity is the loan’s source. Qualified HELOC borrowers may deduct interest on residential loans up to $750,000. If you are married but filing separate returns, you can deduct interest up to $375,000.
Using a HELOC to pay off debts such as credit cards, student loans, or personal loans disallows the deduction.
What Else Should I Know About Getting a HELOC With 650 Credit Score?
Co-Signers and HELOCs
Having a co-signer may improve your chances of obtaining a HELOC. A co-signer is someone with a good credit score and steady income who signs the agreement with you. The person co-signing the loan agreement is legally responsible for repaying the debt if you do not make the required payments.
Home Equity Loan vs HELOC
One alternative to a HELOC is a home equity loan, which provides homeowners a one-time lump sum.
Like a HELOC, you borrow against your home’s equity when you take out a home equity loan. However, you have to repay the entire loan before taking another one. In contrast, HELOCs allow you to withdraw funds repeatedly (up to a specified limit) during the draw period before the loan is repaid.
Learn More About Getting a HELOC With 650 Credit Score by Contacting Renofi Today
A leading lending platform backed by credit unions across the US, Renofi has helped thousands of homeowners complete property renovations by finding the right HELOC lenders for their needs.
RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
If you are interested in applying for a nontraditional loan to remodel or renovate your home, talk to a member of our professional loan originator team.
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