What are the requirements for a HELOC? – Forbes Advisor
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A home equity line of credit (HELOC) can be a good option if you want to use your home’s equity to pay for things like renovations or consolidate debt. As with other loans, there are general requirements to qualify for a HELOC such as: B. Good credit and enough equity in your home.
If you’re wondering how to get approved for a HELOC, here’s what you should know.
How does a HELOC work?
A HELOC is a type of revolving line of credit that you can draw on and pay off over and over again – similar to a credit card. Although guidelines can vary, you can typically access up to about 80% of your home’s equity with a HELOC. Depending on the lender, the repayment periods can be up to 30 years.
Keep in mind that unlike a credit card, the lifespan of a HELOC is split into a draw period and a repayment period. During the draw period, which is typically between five and 15 years, you can withdraw from your HELOC up to your credit limit and only have to make minimal interest payments.
After that, you can no longer make any withdrawals and must pay back the borrowed amount during your repayment period, which is usually between 10 and 20 years.
While the eligibility criteria for a HELOC may vary by lender, there are some general requirements.
Have a certain amount of equity in your home
Equity is the amount left over after dividing your mortgage debt by the current value of your home. To qualify for a HELOC, you should have at least 15% to 20% equity in your home.
However, remember that there are limits to how much you can borrow with a HELOC, regardless of how much equity you have. The limit offered is based on your loan to value (LTV), which you can calculate by dividing your mortgage balance by the current value of your home.
Lenders will also compare all of your debt on the property to its value, known as the combined loan-to-value ratio (CLTV). Most lenders want your CLTV to be no higher than 85% in order to qualify for a HELOC, although some lenders will tolerate CLTVs of up to 90%. To calculate your CLTV, add up all of the secured loans on your property (e.g. your first mortgage, any home equity loans, etc.) and then divide that by the value of your home.
Have good credit
Lenders will check your credit score and history to determine if you are a risky investment. To be eligible for a HELOC, your credit score should be in the mid- to high-600 range—although a score of 700 or higher is even better.
Good credit can also qualify you for a better interest rate. In general, the higher your credit score, the lower your rate.
Show sufficient income and documentation
Lenders want to see that you can afford the repayment, so you need to show you have enough income to qualify for a HELOC. You must provide documentation that illustrates your employment and income information. Income and supporting documents may include:
- Employee wages: Latest W-2 and payslips
- Independence: The last federal tax returns
- Social security benefits: Achievement confirmation letter from your Social Security Account
- Other benefits or income: Retirement award letters, benefit statements, or 1099 forms
View a strong payment history
Another way the lender can determine how risky you are as a borrower is by checking your payment history. While your payment history is an important factor in determining your creditworthiness, the lender might give it special attention over other creditworthiness components.
Because a HELOC is technically a second mortgage, the lender wants extra assurance that you’re reliably paying off your debt.
Have a low amount of debt
Your debt-to-income ratio (DTI) is the amount you owe on monthly debt payments (like your mortgage, credit cards, etc.) compared to your monthly income. Considering your DTI ratio helps lenders determine if you can reasonably handle taking on more debt. This ratio is crucial to whether you qualify for a loan.
To qualify for a HELOC, you typically need a DTI ratio of no more than 43% to 50% — although some lenders may require lower ratios.
How to apply for a HELOC
When you’re ready to apply for a HELOC, follow these five steps:
- Compare lenders. Be sure to shop around and compare your options from as many lenders as possible to find the right HELOC for your needs. In addition to interest rates, consider repayment terms, any fees charged by the lender, and eligibility requirements.
- Gather your documents and fill out the application. After choosing a lender, you must complete a full application. Many lenders offer an online application option, while some traditional banks and credit unions may require a visit to your local branch. Be prepared to provide required documentation such as bank statements, W2s or payslips.
- Have your home appraised. If your income and credit are approved, the lender will usually request an appraisal to calculate the current value of your home. In most cases, the lender schedules the home appraisal but is willing to pay the appraisal fee — typically $300 to $400 for a single family home.
- Prepare to close. Once your home has been appraised, your lender will notify you if you are fully approved for a HELOC and will provide you with additional details, such as: B. your credit line limit and your interest rate. If you decide to proceed, you will need to sign your loan documents. Keep in mind that any closing costs will be added to your loan amount.
- Access your balance. After the loan is closed, you have three business days to withdraw from the loan if you change your mind. After that, you will gain access to your HELOC and be able to withdraw as you please.
How long does it take to get a HELOC?
It typically takes about two to four weeks to complete the application and closing process for a HELOC. In some cases, it can take up to six weeks, depending on the lender and how complicated your application is.
Alternatives to a HELOC
If a HELOC doesn’t seem right for you, there are a few alternatives to consider.
Almost all personal expenses can be covered with a personal loan. Unlike HELOCs, most personal loans are unsecured, meaning you don’t have to worry about collateral.
However, because this type of loan is riskier for the lender, you could end up getting a higher interest rate than with a HELOC.
With a cash-out refinance, you pay off your first mortgage with a second loan that has a larger loan amount than you owe. You will then receive the difference as a lump sum at your disposal, less any closing costs or fees.
Unlike a HELOC, a payout refinance doesn’t give you an additional monthly payment because you’re simply replacing your mortgage with another loan. However, you still risk losing your home if you can’t keep up with your payments.
You may also consider tapping into your home’s equity in other ways with a home equity loan. Unlike a HELOC, which grants you access to a revolving line of credit, a home equity loan is paid out as a lump sum — similar to a personal loan.
Home equity loans also typically come with fixed interest rates, meaning your interest rate and payment will remain the same throughout the life of your loan. Because this type of loan is secured by your home and is less risky for the lender, you’ll likely get a lower interest rate than you would with a personal loan. However, keep in mind that this also means the bank could seize your home if you don’t make your payments.
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