How to qualify for a home equity line of credit

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A home equity line of credit (HELOC) can be a good option if you’re looking to tap into your home’s equity—for example, to pay for home improvements or to consolidate debt. Like with other loans, there are common requirements to qualify for a HELOC, such as having a good credit score 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 credit line that you can repeatedly pull from and pay off—similar to a credit card. While guidelines can vary, you can typically access up to about 80% of your home’s equity with a HELOC. Repayment terms can be up to 30 years, depending on the lender.

Keep in mind that unlike a credit card, a HELOC’s term is split into a draw and repayment period. During the draw period, which typically ranges from five to 15 years, you can make withdrawals from your HELOC up to your credit limit and are only required to make minimum interest payments.

Afterward, you’ll no longer be able to make withdrawals and must pay back whatever amount you borrowed during your repayment period, which usually ranges from 10 to 20 years.

HELOC Requirements

While the eligibility criteria for a HELOC can vary by lender, there are some common requirements.

Have a Certain Amount of Equity in Your Home

Equity is the amount you’re left with after dividing what you owe on your mortgage from your home’s current value. To qualify for a HELOC, you should have at least 15% to 20% equity in your home.

Keep in mind, though, that there are limits to how much you can borrow with a HELOC, no matter how much equity you have. The limit you’re offered will be based on your loan-to-value (LTV) ratio, which you can calculate by dividing your mortgage balance by your home’s current value.

Lenders will also look at all your debt on the property against its value, called the combined loan-to-value (CLTV) ratio. Most lenders want your CLTV to be no higher than 85% to qualify for a HELOC, though some lenders will tolerate CLTVs as high as 90%. To calculate your CLTV, add up all of the secured loans on your property (such as your first mortgage, any home equity loans, etc.), then divide this by the value of your home.

Have Good Credit

Lenders review your credit score and history to determine if you’re a risky investment. To get approved for a HELOC, your credit score should fall in the mid-to-high 600s—though a score of 700 or higher is even better.

Having 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 repayment, which is why you must prove that you have enough income to qualify for a HELOC. You’ll need to provide documentation that illustrates your employment and income information. Income and accompanying paperwork could include:

• Employee wages: Most recent W-2 and pay stubs
• Self-employment: Most recent federal tax returns
• Social Security benefits: Benefit verification letter from your Social Security account
• Other benefits or income: Retirement award letters, benefit statements or 1099 forms

Show Strong Payment History

Another way that the lender will determine how risky of a borrower you are is by reviewing your payment history. While your payment history is a major factor in your credit score, the lender might pay special attention to it over other credit score components.

Because a HELOC is technically a second mortgage, the lender will want to be especially sure that you will reliably pay back what you owe.

Have a Low Amount of Debt

Your debt-to-income (DTI) ratio is the amount you owe on monthly debt payments (such as your mortgage, credit cards, etc.) compared to your monthly income. Considering your DTI ratio helps lenders determine if you can reasonably manage taking on more debt. This ratio is key to whether you qualify for a loan.

To qualify for a HELOC, you’ll typically need a DTI ratio no higher than 43% to 50%—though some lenders might require lower ratios than this.

How to Apply for a HELOC

If you’re ready to apply for a HELOC, follow these five steps:

1. 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. Consider not only interest rates but also repayment terms, any fees charged by the lender and eligibility requirements.
2. Gather your documentation and fill out the application. After you’ve picked a lender, you’ll need to complete a full application. Many lenders provide an online application option while some traditional banks and credit unions might require a visit to your local branch. Be prepared to provide required documentation, such as bank statements, W2s or pay stubs.
3. Get your home appraised. If your income and credit are approved, the lender will generally ask for an appraisal to calculate your home’s current value. In most cases, the lender will schedule the home appraisal, but be prepared to pay the appraisal fee—typically $300 to $400 for a single-family home.
4. Prepare for closing. Once your home has been appraised, your lender will notify you if you’ve been fully approved for a HELOC and will provide additional details, such as your credit line limit and interest rate. If you decide to proceed, you’ll need to sign your loan documents. Keep in mind that any closing costs will be added to your loan amount.
5. Access your funds. After the loan has been closed, you’ll be given three business days to back out of the loan if you change your mind. Following this, you’ll receive access to your HELOC and can begin making withdrawals 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 could take as long as 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.

Personal Loan

A personal loan can be used to cover almost any personal expense. Unlike HELOCs, most personal loans are unsecured, which means you don’t have to worry about collateral.

However, because this kind of loan is riskier for the lender, you might end up with a higher interest rate compared to what you’d get with a HELOC.

Cash-out Refinance

With a cash-out refinance, you’ll pay off your first mortgage with a second loan that has a higher loan amount than what you owe. You’ll then get the difference as a lump sum to use how you wish, minus any closing costs or fees.

Unlike a HELOC, a cash-out refinance won’t land you with an additional monthly payment as you’re simply replacing your mortgage with another loan. However, you’ll still risk losing your house if you can’t keep up with your payments.

Home Equity Loan

You could also consider tapping into your home’s equity another way with a home equity loan. Unlike a HELOC that gives you access to a revolving credit line, 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, which means your rate and payment will stay 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 compared to what you’d be offered on a personal loan. However, remember that this also means the bank could seize your home if you fail to make your payments.

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