Bad Credit HELOC: Why Co-Ownership Is Smarter

The longer you pay your existing mortgage, the more equity you’ll build up in your home. Eventually, you may want to use that equity for a home renovation, to start a business, to pay a medical bill, to go back to school, to get a second mortgage for a new property acquisition, or for some other reason. 

A home equity line of credit (HELOC) is one option for using your equity, but it might not be the best. In many cases, the more intelligent choice might be to enter into co-ownership. Let’s break a HELOC with bad credit and why Balance could be the better option. 

What Is a Bad Credit HELOC?

Home equity lines of credit are lines of credit that you take out using the equity you have in your property. For a HELOC to be accepted, you must “secure” the credit line by using your home equity as collateral. This means that if you were to default on the HELOC for any reason, the lender could foreclose on your home.

A “bad credit HELOC” is a home equity line of credit available to those with lower credit scores, with a minimum of 620 — however, this type of HELOC often has stricter requirements in other ways, such as requiring a higher loan-to-value ratio and lower debt-to-income ratio. In other words, people with low credit scores could be granted a HELOC when these scores would usually be a reason to reject the proposal. 

How Does a HELOC Work?

Regardless of the credit requirement of a HELOC, they all work the same way: 

  • You get access to a revolving line of credit equal to the total amount of equity in your home. The maximum amount is usually 80-85% of your combined loan-to-value ratio (LTV), which measures the difference between the value of your home and how much you’re borrowing. 
  • As a revolving line of credit, you can use it, pay it off, and use it again as much as you like. A HELOC's open-ended nature differs from a home equity loan, where you receive a single lump sum payment and slowly repay it over time. 
  • The monthly payment for a HELOC is interest only, so they usually carry a low minimum monthly payment. It is important to monitor the balance of the loan because, depending on the terms set for the transaction, a HELOC can come due, and the remainder of the balance will be owed in a lump sum.
  • They are also adjustable, so the interest rate changes with the market.

Generally, HELOCs have a lower fixed interest rate when compared to most other types of unsecured loans and credit cards, however the interest rate can change resulting in a higher payment than originally anticipated. 

HELOC Stages

The loan terms of a HELOC involve two stages: a draw period and a repayment period.

Depending on the details of your HELOC, you may have a draw period lasting for 10 years, 20 years, or even longer. You can borrow as much or as little as you need as long as it’s within your credit limit.

The repayment period begins with the conclusion of the draw period. Typically, the repayment period will last twice the length of the draw period, but it can vary depending on the specific repayment terms. You’ll repay whatever you owe on your HELOC and the agreed-upon interest during this time. 

Remember that, as with any home loans or HELOCS catering to those with poor credit, you’re likely to see a higher interest rate, lower loan amount, and lower credit limit than you would with a good credit score. 

In addition to credit, other factors that can impact the terms of your HELOC include your debt-to-income ratio (DTI ratio), the aforementioned LTV ratio, whether you have a cosigner for the line of credit, and so on. 

The best way to improve the terms of your HELOC is to look for opportunities to improve your credit. For example, reducing the other debt payments under your name could go a long way toward boosting your score. 

What Are the Benefits and Downsides of HELOCs?

Even if you can’t improve your score before taking out the HELOC, there are many advantages that a bad credit HELOC has when compared to other options — however, there are also some pitfalls.

Bad credit HELOCs usually have lower APRs compared to credit cards. Most credit cards are unsecured, which means a higher interest rate. Since a HELOC features your home equity as collateral, the lender takes less risk, so you’ll typically receive a lower interest rate. 

Making on-time loan payments with a HELOC can help to boost your credit history, credit mix, and payment history, leading to a higher credit score. 

That said, HELOCs do carry adjustable interest rates, and since your home is being used as collateral, the lender could foreclose on your home if you fall behind. 

What Is Co-Ownership?

Home co-ownership is an arrangement where two or more parties share the ownership and responsibilities of a property. With co-ownership, homeowners get paid cash for a share of their home's equity. 

How Does Co-Ownership With Balance Work?

Balance offers an innovative approach to co-owning with our homeownership program. With our co-investment structure, we’ll pay off your existing mortgage and replace it with an equity investment. Then, you’ll make a monthly payment directly to us, rather than to a lender, to cover your occupancy of the home and your share of costs like taxes and insurance.

As a co-owner, Balance also shares in monthly expenses, as well as appreciation and depreciation of the home. In the meantime, you can tap into your home equity and use that cash to help settle debts, pay off past-due balances, make home repairs, and improve your financial profile.

Balance has no minimum term, so you’re not tied down — you can buy us out at any time. 

What Are the Benefits of Co-Owning With Balance?

Co-owning with Balance comes with its fair share of benefits:

  • Because our equity investment replaces your existing mortgage, you can enjoy more financial flexibility to make home improvements, consolidate debts, and work to improve your credit score. 
  • Balance has no minimum term and no minimum credit score requirement, meaning it remains accessible for those who might not qualify for other options.
  • Homeowners have ongoing access to a portion of their home equity, helping them avoid financial setbacks along the way. 

By maintaining your home equity and working proactively, Balance believes we can help you rebuild your credit and overall financial health.

Contact Balance Today

HELOCs can be risky since your home is used as collateral. If a HELOC doesn’t fit your needs, there's another option that many other homeowners have already discovered: co-ownership with Balance.

At Balance, many of our co-owners came to us because their credit score made it challenging to qualify for a favorable loan, and they had a lot of debt that needed to be paid off — but because they couldn’t qualify for a loan, they couldn’t pay the debt off or improve their credit score, and they were stuck in a debt cycle.

Balance gets you the cash you need to get that fresh start to pay off the debts and improve your credit score so that you can get out of the debt cycle.

Partnering with Balance could be the best way to get the monetary value of your equity without losing total control of your home — you'll remain a co-owner throughout our equity investment arrangement and be able to buy out Balance later if you want. 

Contact Balance today to learn more.


My lender offered me a home equity line of credit (HELOC). What is a HELOC? | Consumer Financial Protection Bureau

HELOC (Home Equity Line of Credit) and Home Equity Loan: Comparing Your Options | Investopedia

Understanding your home's equity | Freddie Mac