If you’re looking for a way to get out from under all those burdensome credit card bills, a home equity line of credit (HELOC) could be just the ticket. After all, you can use the borrowed funds however you wish, including to pay down debts, particularly those with higher rates. But are you eligible for a HELOC? If you aren’t sure, you’re in luck. Here’s how to qualify for a home equity line of credit.
What Is A HELOC?
A home equity line of credit allows you to borrow money from the equity – the difference between your mortgage’s balance and your home’s value — you’ve established in your home. A HELOC gives you a line of credit that you can use for major expenses or to consolidate obligations such as credit cards that carry higher interest rates.
HELOCs usually have a lower interest rate than some other loans for good reason: your home serves as collateral. This means that you must be certain you can keep up payments.
What Are The Benefits Of An HELOC?
In addition to a lower interest rate and the freedom to use your line of credit as you see fit, a HELOC gives you flexibility during your “draw” and repayment periods. This means that you may just borrow what you need – up to 85% of your home’s value, less outstanding mortgage payments.
How Do HELOCs Work?
You can liken a HELOC to a credit card, meaning that as you repay your balance, the amount of available credit is replenished. Thus, you may borrow against your equity as frequently as you wish, in whatever amounts, up to the credit cap established at closing. Your borrowing takes place during your draw period – typically 10 years in duration. After that, the 20-year repayment period begins.
What Are Eligibility Requirements?
Requirements vary by lender, but in addition to your equity, the amount you can borrow generally depends on your earnings, credit score and history, monthly debts, and your low debt-to-income ratio. Let’s look closer.
Have Sufficient Equity. Lenders use your equity – at least 15-20% is needed — to figure out your loan-to-value (LTV) ratio, which helps determine your eligibility. Your LTV can be determined by dividing your current loan balance by your home’s appraised value.
Usually, you can borrow up to a combined LTV of 85%. This means that the sum of your mortgage and your hoped-for loan amount can comprise no more than 85% of your home’s value. Learn more at Bills.com.
As for HELOC tips, note that you can build home equity by paying down your mortgage and making home improvements.
Have A Good Credit Score. While most lenders prefer a score of at least 700, if you have the equity, you can likely get in the door with a credit score of at least 680. There also have been approvals with scores of 621 to 679.
If you are below 620, though, you’re going to have to have a lot more equity and have a low debt-to-income (DTI) ratio. You also will likely get a higher interest rate on lower amount with shorter terms.
Have A Low DTI. Speaking of DTI ratios, the lower the better, although how much weight the factor carries depends on the lender. Your DTI compares your total monthly debt load to your gross monthly earnings. Lenders like to see a debt-to-income ratio of 43% or lower. Some require that your monthly obligations gobble up less than 36% of your gross pay.
Have Sufficient Income. While many lenders don’t list income requirements, most will assess whether you make enough to repay your loan. In any case, be ready to provide proof of income (W-2s, paystubs, etc.).
Have a good payment history. Lenders don’t want to take on too much risk. One way they gauge risk is by assessing prospective borrowers’ payment history. In other words, if you tend to pay your bills on time, lenders may be more willing to lend to you.
The bottom line is that knowing how to qualify for a home equity line of credit gives you a good idea of what you’re in for – and what you may need to improve upon before applying.