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Minimum Credit Score for Home Equity Loan 

 September 2, 2022

By Andrew Wan  

minutes read time

Home prices have soared over the past 12 months, giving homeowners access to more equity than ever before. For many, turning that home equity into cash means turning to a lender for a home equity loan or home equity line of credit. But to do so, you’ll often have to meet a lender’s criteria to be eligible.

Having a minimum credit score is often one of these requirements, but what exactly is the lowest score you can have and still qualify for a home equity loan or line of credit? This varies depending on the lender, but the minimum cutoffs are commonly found in 20-point increments, starting at 700.

The minimum credit score for a home equity loan is usually at least 700. At that score, it’s a safe bet you’ll meet most lenders’ minimum requirements. Scores of 680 and 660 are also common credit score minimums. And while it is possible to find lenders with a minimum of 640 or 620, the interest rates may be quite a bit higher. 

So how are credit scores calculated and what can you do to improve your odds of approval? Read on as we’ll dive into the different types of credit scores, how you can check your own score, how to improve it, and what options you might have if you think your score is not high enough.

What credit scores are used for a home equity loan or equity line of credit?

Lenders may choose from many different types of credit scores to evaluate their loan applications. The most common type of credit score used by lenders is a FICO score. On top of that, there are 3 major credit bureaus, each of which has its own version of a FICO score. Within each credit bureau also exist different types of scores. 

What are the 3 major credit bureaus?

Equifax, Experian, and Transunion are the three most common credit bureaus where lenders obtain credit scores. Some may only pull scores from a single bureau, while others may pull all three.

Are there different types of credit scores?

In addition to the scores, you’ll find at the 3 credit bureaus, there are also different versions of credit scores. This includes different model years and scoring models for varying types of loans. 

For example, an auto lender may be more interested in the likelihood that a customer will miss a car payment or have their car repossessed. So, they may use what’s called an auto-enhanced score, which weighs auto payment history much more heavily in determining risk. Similar versions exist to determine the likelihood of missing a credit card or home loan payment. 

How do I check my credit score?

There are several ways you can check your credit score for free. Some credit card companies offer free credit scores as a perk of card membership. If this is not an option for you, Credit Karma is a popular and free credit monitoring service you can consider.

If you’re looking for a specific version of a credit score, you may have to pay for it. MyFICO offers a wide range of scores for varying prices. However, knowing where you stand could end up giving you the information you need to get a lower interest rate, so it could be well worth the investment.

How can I quickly raise my credit score?

Raising your credit score can qualify you for a better interest rate, which in turn could end up saving you thousands of dollars in interest on your home equity loan. Many lenders use tiered pricing, where you can qualify for a better rate once you reach a certain score.

For a high score, you’ll want to first review your credit report for any errors. There are also five major categories that determine your credit score, which we’ll go into detail below.

Review your credit report for inaccurate data

According to an article from CNBC, as many as one-third of Americans discovered errors on their reports. Lenders can make mistakes, so it’s a good idea to check your own credit reports for accuracy. Not all errors result in a credit score being impacted, but if you do discover a major discrepancy, you’ll want to address it as soon as possible since correcting errors can often take some time to resolve.

How is my credit score determined?

Your credit score is determined by five major categories. If you’re looking to raise your score, you should focus on maximizing your points in each of the following areas.

PAYMENT HISTORY (35%)

One of the largest categories that determine your score is how consistently you pay your bills on time. This includes items such as whether you regularly make your payments on time, and whether you have any derogatory credit like collection accounts or charge-offs.

Recent late payments affect your score much more. Over time, they have a smaller impact on your score. Continue making payments on time, and you should see your score gradually rise.

BALANCES OWED (30%)

Another category that weighs heavily into your credit score is how much debt you carry. If you are maxed out on your credit cards and have balances that are near or at the maximum credit limit, your credit score will be negatively impacted. Similarly, the more accounts you have with a balance, the more it will hinder your ability to score high.

A good rule of thumb is to keep your credit card balances at 30% or less of the maximum credit limit.

LENGTH OF CREDIT HISTORY (15%)

15% of your score is based on how long you’ve had credit. The longer the track record you have, the more reliable you’ll appear as a borrower, and the less risky you’ll appear to lenders.

This category of your credit score focuses not only on the total length of your credit history but also on the average age of your credit history. So borrowers who regularly open and close accounts will be hurt with a lower average age of accounts.

MIX OF CREDIT (10%)

The more experienced you are with different types of credit, the more your credit score will love you. Some examples of different types of credit include revolving credit cards, open charge cards, mortgage accounts, auto loans, and installment loans.

RECENT CREDIT ACTIVITY (10%)

Finally, the remaining 10% of your FICO credit score is based on your recent credit activity. This includes recent credit inquiries and recently opened accounts.

A credit inquiry gets placed on your credit report each time you apply for credit. However, an exception does exist for certain types of loans. Any auto and home loan-related credit inquiries done within a 14 to 45-day window are treated as a single credit inquiry for the purposes of your credit score, as it is common for borrowers to shop rates with multiple lenders.

Can I get a home equity loan with a 500 credit score?

With a credit score of 500, your choices for home equity loans will be limited, but not impossible. Your best chance is to find a hard money lender, a company that will take into consideration other items besides just your credit score. These lenders focus on things like the amount of equity in your home, your debt-to-income ratio, any assets you have in deposit accounts or investments, and your income and employment history.

The home will be used as collateral for the loan, and in the event you are unable to make payments, the lender may take possession of the home to recoup their losses.

Due to the higher amount of risk, hard money loans will often come with higher interest rates and fees charged.

Can you get a home equity loan with a 620 credit score?

With a credit score of 620, you will have many more options to get approved for a home equity loan. You may still encounter a handful of lenders who may have higher minimum requirements, but there should still be plenty of others willing to lend to you.

You also may not qualify for the best interest rates, but they will most certainly be more competitive than that of a hard money loan.

What if I’m denied a home equity loan?

If you don’t meet a lender’s minimum criteria to qualify for a home equity loan, ask the lender if they are willing to grant an exception to their credit policy. Oftentimes, if the other areas of your application are strong enough, they may be willing to show some flexibility.

For instance, if your credit score is just a few points shy of the minimum required, having a lot of equity in your home, strong employment and income, and/or a significant amount of assets in your bank accounts are all items that can be useful in requesting an exception.

How long does it take to get a home equity loan?

From the time you submit an application, expect anywhere from 30-45 days before your loan is approved and funds are available for you to access.

Depending on the lender, it’s possible that the process can be completed much more quickly. This will be highly dependent on how busy they are, and what steps are involved for your specific loan. The exact steps can vary depending on the lender but are largely similar.

Submit an application

Once you have decided which lender to go with, you can submit an application so that the lender has the basic information needed to begin reviewing and processing your loan. In some cases, you’ll need to agree to a hard credit pull. If you have frozen any of your credit bureaus, it’s a good idea to unfreeze them before submitting the application to avoid any delays.

Provide the lender with any requested docs for initial application review

After an initial review of your loan application, the lender may request documentation from you. This can be explanations for any discrepancies they see, clarification on your application, income documents to determine your debt-to-income ratio, bank statements, or more. When you send these documents back to your lender, it’s a good idea to make sure they are clear, legible, and contain all requested pages.

Schedule third-party inspections

Depending on the specific lender’s requirements, you may need to coordinate third-party inspections of your property. An appraisal is the most common type of inspection required and may involve a certified appraiser coming to the property to physically inspect the interior and exterior.

This appraisal process is done primarily to determine the equity in your home, the loan to value ratio, and whether there are any visible issues with the condition of the property.

Provide any documents requested by underwriting for final approval

Before issuing any final approval, the lender will review any documents it previously requested from you, as well as the appraisal report or any other inspections that were required.

If the lender still has any additional questions, they will reach back out to you for further clarification. If the lender deems all documents acceptable, you’ll be able to move forward to the next step.

Schedule signing with a notary

One of the last steps of the home equity loan process is signing your final loan documents with a notary public. Many lenders use mobile notaries who can travel to your home or place of employment.

The notary will review your identification to confirm you are who you say you are, before allowing you to sign the final loan documents. Although there should be no surprises at this point, mistakes can happen. Read through the loan documents carefully to make sure there are no errors. 

Loan funds

Congratulations! Once you finish your signing with the notary public, the documents will be sent back to the lender for final review. At this stage, the lender will disburse funds for your home equity loan, at which point you should have the ability to access the funds within 24 hours.

Minimum credit score for home equity loan

The minimum credit score to qualify for a home equity loan can be different depending on the lender. The higher your credit score is, the greater the chance you’ll get a lower interest rate.

But even with a score as low as 500, it’s possible to qualify for an equity loan or HELOC. Knowing how scores are calculated can be helpful, as you’ll be able to take the steps needed to make sure it’s as high as possible when you apply for that loan.

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With a decade of experience as a mortgage underwriter and a licensed California real estate broker since 2018, I use my expertise and experience to share insights on the housing industry. I cover a wide variety of topics, from buying a home to what the home loan process entails, and enjoy sharing tips to help better prepare you for how to make it all a seamless experience.

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