A home equity line of credit or HELOC is a revolving credit secured against your home. You can draw money from the maximum credit amount set by the lender. During a fixed time period, for instance ten years, you can borrow money whenever there is a requirement. The lender will look at your income, debt obligations, credit history and basically your ability to pay back the borrowed credit when approving the loan. Even with a poor FICO score, you can get a HELOC. Here is a look at some of the things that borrowers with bad credit scores must know about a HELOC.Your home equityThe key factor that the lender considers when approving a home equity line of credit is your home equity. The approval is more dependent on how much equity you have in your home than your FICO score. If your home’s current market value is $300,000 and you owe $250,000 on your mortgage, then the maximum credit limit approved will be $50,000. This is another reason why homeowners with an unimpressive credit score but substantial home equity can be confident of getting a HELOC.Credit limit and interest rateWhile poor credit borrowers can get a HELOC quite easily, the lender may offer the credit line at a high rate of interest and approve a lower credit limit. For instance, if you hold equity of $50,000 in your home, then the entire amount may not be available for you to draw from. The lender may set a credit limit lesser than $50,000 in lieu of your poor credit score. But getting a lower credit limit is better than not getting any credit at all and this is a compromise that poor credit borrowers will have to make.The interest rates charged on a HELOC will also be higher if you have a poor FICO score. This is typical of all types of loans – interest rates charged for excellent credit scores is low while bad FICO scores attract higher rates. This is only fair as the lender is taking a substantial risk by loaning money to a borrower with an unreliable financial history.Adjustable interest rateA home equity line of credit is offered with an adjustable rate of interest, with the rates fluctuating with the prime rate. A HELOC may be offered with a guaranteed, fixed introductory rate for a few months, after which it will be adjusted in accordance with the prevailing prime rate. There is also no adjustment cap, so a HELOC may be quite risky if the prime rates see an upward increase in a span of two or three years. Poor credit borrowers, who have been approved the credit line at already high interest rates must take this factor into consideration when they go for home equity lines of credit.You should take out a home equity line of credit only if you anticipate future expenses, such as college fees, medical bills and wedding costs. Avoid lenders who charge unreasonably high interest rates keeping your poor FICO in mind. Also see if you can improve your score and apply for a HELOC at a more suitable time in the near future.
