Home Equity Loan With Bad Credit: Texas Options

What credit score do you need for a home equity loan or HELOC?

No federal rule sets a minimum credit score for a HELOC or home equity loan. Each lender sets its own. Government-backed and agency refinances do have published floors. Most credit scores run from 300 to 850 (CFPB), and lenders typically use your middle score from the three credit bureaus. On a joint application, rules differ: agency refinance programs generally use the lower of the borrowers’ middle scores, while some banks base a home equity decision on the stronger applicant’s score. Ask your lender which approach it uses.

The tier labels come from the credit-score question on Herring’s online application. Program minimums come from HUD and from each lender’s published guidelines.

Why HELOCs need higher scores than refinances

A HELOC or home equity loan usually sits in second position behind your first mortgage. In a default, the second-lien lender is paid only after the first mortgage is paid in full, so it carries more risk and asks for stronger credit. A cash-out refinance creates a single first lien. An FHA cash-out also carries federal mortgage insurance, which is why FHA can accept lower scores.

How lenders weigh equity (CLTV), DTI and payment history

Your credit score gets you in the door. Three other factors decide whether you’re approved and how much you can borrow.

1. Combined loan-to-value (CLTV)

CLTV is the total of every loan on the home divided by the appraised value. Texas sets a hard ceiling of 80% (Art. XVI, Sec. 50(a)(6)(B) of the Texas Constitution). Herring’s Texas HELOC goes up to 75% CLTV. The lower your CLTV, the more cushion the lender has, so asking for less money can make up for a weaker score.

2. Debt-to-income ratio (DTI)

DTI is your total monthly debt payments, including the new equity payment, divided by your gross monthly income. Herring’s HELOC caps DTI at 40%. Here’s how that works: on $7,500 a month of gross income, total debt payments can’t exceed $3,000. If your score is borderline, a low DTI is one of the strongest offsets you can show.

3. Mortgage payment history

Lenders look hardest at how you’ve paid your mortgage. An FHA cash-out refinance, for example, requires every mortgage payment in the previous 12 months to have been made in the month it was due, and at least six months of payments on the current loan (HUD Handbook 4000.1). A 600 score caused by old medical collections is a very different file from a 600 score caused by a mortgage payment that was 60 days late last spring.

Home equity loan with bad credit: options by score

Worked example: Lubbock homeowner with a 640 score

James owns a $300,000 home in Lubbock. His mortgage balance is about $150,000 at 4.5%, with a $887 principal-and-interest payment. He has $45,000 in credit card debt with minimum payments of about $1,350 a month. His middle credit score is 640, below Herring’s 660 HELOC minimum, so the conversation turns to an FHA cash-out refinance:

• Texas 80% cap: $300,000 × 80% = $240,000 maximum.
• New base loan: $150,000 payoff + $45,000 cards + $15,000 cash + about $5,000 costs = $215,000 (71.7% LTV).
• Upfront MIP: $215,000 × 1.75% = $3,763, financed. Total loan: $218,763.
• Payment: about $1,492 principal and interest at an illustrative 7.25%, plus annual MIP of about $90 a month (0.50%). Total: about $1,582.
• Before: $887 mortgage + $1,350 cards = $2,237 a month.

James’s monthly debt payments drop by about $655. The costs are real, though. He gives up a 4.5% rate, restarts a 30-year term, and turns unsecured card debt into debt secured by his home. If he runs the cards back up, he ends up worse off than when he started. Property taxes and insurance don’t change, so they’re left out. Use Herring’s refinance calculator to try your own numbers.

Texas rules that protect equity borrowers

Texas has some of the strongest home equity protections in the country. These rules apply to every 50(a)(6) loan, including HELOCs, home equity loans and cash-out refinances on a homestead, whatever your credit score:

• 80% cap. Total liens can’t exceed 80% of fair market value. You and the lender both sign a written acknowledgment of that value.
• Non-recourse. You and your spouse aren’t personally liable for the debt, unless the loan was obtained by actual fraud. The lender’s remedy is the home, not your wages or other assets.
• Judicial foreclosure. A lender can foreclose only with a court order, not through the faster non-judicial process used for most Texas mortgages.
• 2% fee cap. Lender and third-party fees are limited to 2% of the principal. Appraisal, survey, the title insurance base premium and certain title exam reports don’t count toward the cap.
• 12-day wait and approved closing locations. Closing can’t happen until 12 days after you apply or receive the Texas notice, whichever is later. It must take place at the lender’s office, an attorney’s office or a title company.
• No acceleration for falling values. The lender can’t call the loan because your home’s value drops or because you default on unrelated debt.
• No forced payoffs to the same lender. You can’t be required to use the proceeds to pay another debt you owe that lender, unless the debt is secured by the homestead.
• No blank documents. You can’t be asked to sign anything with blanks in its substantive terms.

Red flags: “no credit check” equity offers

Borrowers with damaged credit are the main targets of predatory equity lending. Walk away if you see any of these:

• “No credit check” or “guaranteed approval.” A legitimate Texas home equity lender has to review your ability to repay. A lender that doesn’t care whether you can pay may be counting on taking your equity instead.
• Fees before an application or appraisal. Be wary of large “processing” or “approval” fees paid before you get a Loan Estimate. Herring’s appraisal fee is paid upfront, but it covers a specific third-party appraisal.
• Pressure to close quickly. In Texas, a home equity loan can’t legally close before the 12-day waiting period ends.
• Closing at your kitchen table. Texas home equity loans must close at a lender’s office, an attorney’s office or a title company.
• Blank or incomplete paperwork. Never sign a document with blanks in its terms.
• Unlicensed lenders. Section 50(a)(6)(P) lists the types of lenders allowed to make these loans. Check your lender’s NMLS number at NMLS Consumer Access.

How to improve your approval odds

1. Pull all three credit reports at AnnualCreditReport.com and dispute any errors. A mortgage late payment reported by mistake hurts more than almost anything else.
2. Pay credit card balances below 30% of each limit before you apply. Utilization is recalculated every month, so this is the fastest way to raise your score.
3. Ask for less. A lower CLTV reduces the lender’s risk. Requesting $30,000 instead of $60,000 can change the decision.
4. Lower your DTI. Pay off a small installment loan or a car with only a few payments left before you apply.
5. Keep every mortgage payment on time. Twelve months of clean mortgage history is required for FHA cash-out and weighs heavily for every other option.
6. Write a letter of explanation for one-time events like a medical crisis, a job loss or a divorce, and show how things have stabilized.
7. Ask about a rapid rescore if you’ve paid down balances or corrected errors. Your lender can sometimes get the updated score in days instead of waiting a month.

Our guide on how to buy a house with bad credit covers these credit-repair steps in more depth, and HELOC requirements covers the full qualifying checklist.

Alternatives if you’re declined

• FHA cash-out refinance. If a HELOC was declined for credit, this is often the next stop. See FHA loans for borrowers with bad credit.
• Add a co-borrower who is on title and has stronger credit and income. A co-borrower’s income always helps DTI. Whether their stronger score helps depends on how the lender scores joint applications, so ask first.
• Wait 3 to 6 months while you pay down balances, then reapply. Moving from 640 to 660 can bring a HELOC within reach.
• A personal loan or 0% balance transfer for smaller amounts. These cost more, but they don’t put your home on the line.
• A HUD-approved housing counselor (free or low-cost) can help you compare options or work out a plan with creditors.

Herring Bank NMLS #415783 | Member FDIC | Equal Housing Lender. This article is for educational purposes only and does not constitute financial, legal or tax advice. It is not a commitment to lend. Rates and payments shown are examples, not offers. Approval is subject to credit, income and property review. Loan programs, rates and eligibility requirements are subject to change without notice. Texas home equity rules are summarized as general information.