Credit Score Requirements for HELOC
If you are considering applying for a home equity line of credit (HELOC)—which is a revolving credit account that lets you borrow money against the value of your home—meeting the minimum credit score for HELOC approval is one of the most important factors to drive success. Having the right HELOC credit score can help you qualify for a lower interest rate and more favorable terms on your line of credit.
While Discover offers home equity loans and mortgage refinance, we do not provide HELOCs. But assessing your qualifications for a HELOC can help you understand your eligibility for similar home equity loans: allowing you to select the home equity product that best suits your needs.
To stay one step ahead of the game, make sure you understand the HELOC credit score requirements before you apply. Here's what you need to know:
Understanding why your HELOC credit score matters
Different lenders will have different requirements for what your HELOC credit score should be. But in general, a credit score of 700 or higher is preferred. (For a Discover fixed-rate home equity loan—where you get your money in a lump sum— a minimum score of 620 needed.)
Your credit score is not the only part of your financial life that matters when getting approved for a HELOC, but it's one of the key requirements. Having a good credit score shows lenders that you are a responsible borrower who is likely to make payments on time and to pay off your debt. When you have a good credit score, it helps you qualify for a lower interest rate because lenders believe that you are a “better risk" for them to lend money to; they want to get repaid, and your credit score helps reassure lenders.
Getting a HELOC with a lower credit score
What if you have less than the minimum credit score for HELOC approval? Even if you have a credit score below 700, you may still be able to get approved for a HELOC. But the other details of your application, such as your amount of home equity, your income (DTI) ratio—which is your existing debt payments, as well as the projected payment for your new home equity loan compared to your total pre-tax income—and your combined loan-to-value (CLTV) ratio need to be strong.
The CLTV ratio is calculated by looking at your existing home mortgage balance (how much you already owe on your home), plus the amount of money you are seeking to borrow with a HELOC, divided by your home value:
CLTV = (HELOC amount that you want to borrow + Existing Mortgage Balance) / Assessed Value of Home
Typically, a borrower can borrow less than 90% of the home’s CLTV. So for example, if your home is worth $200,000 and you still owe $120,000 on your mortgage, you could potentially qualify for a home equity loan of less than $60,000 (depending on your credit score). (Discover Home Loans—which offers low, fixed-rate home equity loans—offers loans for less than 90% CLTV.)
If you have a lower credit score than the requirements suggest, you may still qualify for a HELOC if you have enough equity in your home, and if your overall debt levels are low enough as a percentage of your income. However, you might need to be prepared to pay a higher interest rate or accept a lower borrowing limit than you could qualify for with a higher credit score because you would be considered a “riskier" borrower. Lenders may charge a higher interest rate or offer a lower loan amount to minimize the risk of nonpayment on the loan.
If you are concerned about your credit score, you might consider applying for a lower HELOC amount so that your CLTV ratio is well below 90%, to improve the chances of being approved.
Length of credit history or “credit age" is another key factor in your credit score
Reviewing your HELOC credit score
Building credit and contributing to your credit score doesn't happen overnight, but with a few adjustments to your personal finances, you can make steady progress and hopefully qualify for a lower interest rate or better terms on your next loan or line of credit.
Here are some quick tips for your credit score:
1. Make sure your credit reports are accurate. Whether or not you're applying for a HELOC, everyone should check your credit reports each year. You can get a free credit report from each of the three major consumer credit reporting companies at AnnualCreditReport.com—which is the official government-approved site. Check your credit report for errors, such as accounts fraudulently opened in your name, or payments that were incorrectly reported as late. If there are errors, you can contact the credit reporting company and ask to have the records removed.
2. Avoid late payments. Payment history makes up a big part of your credit score, so it's important to pay your bills on time. Even if money is tight and you cannot afford to pay more than the minimum on a credit card, make sure to pay the minimum amount on time.