To qualify for a HELOC, it’s important to have a solid credit score. While every bank has slightly different requirements for loan qualification, your credit score needs to be at or above 660 before you can likely quality for a HELOC. Keep in mind that 660 is the minimum. For example:
- With a 660 score, you may be eligible for a line of credit worth 70% of your home’s value *
- With a 720 score, you may be eligible for a line of credit worth 95% of your home’s value *
But beyond these initial considerations, you might also be wondering what could happen to your credit after obtaining a first-lien HELOC. A HELOC is designed to extend your available credit to put it to good use – paying down what you owe on your home quickly. Any change to your financial picture (including access to any type of credit) can have an impact on your credit score. A HELOC is no different. Although a HELOC gives you ongoing access to your home’s equity, that could lead to slight differences when it comes your credit score.
Factors That May Affect Your Credit Score
Some credit reports have HELOCs listed like a credit card rather than a financial vehicle that takes the place of your mortgage. And, as you may know, too many open lines of credit can bring down your score, if only temporarily.
In addition, using all your available credit with a HELOC can initially have negative consequences on your score because maxing out your credit is considered more of a risk – even if you’re making on-time payments each month. Make no mistake, making a late payment or missing a payment can both lower your credit score – no matter what type of credit source involved. However, over time, making timely payments on your home equity line of credit and developing an excellent payment history will only improve your overall credit record.
What’s more, closing a HELOC does reduce your available credit and could have a negative impact. This is especially true if you don’t have other revolving credit, have a short credit history, or have relatively few credit cards. Because credit history makes up about 15 percent of your score, the longer positive credit history you have, the better.
A HELOC May Improve Your Financial Picture
By using the HELOC approach correctly and strategically, you can improve your financial situation by paying off your home, lower your overall debt, and positively impact your credit score. Keep in mind that the whole point of a first-lien home equity line of credit is to reduce and consolidate debt by paying down your mortgage – leading to financial freedom. If you follow the plan closely and responsibly, your financial picture should continue to improve over time.
* Depending on your lender’s particular requirements