When you take out a HELOC (home equity line of credit), you borrow against the equity you have built-in your home. It’s basically a revolving line of credit that you can borrow against as needed for a certain term of time. It’s a smart way to access cash to pay for home improvements, consolidate high-interest debt, pay for education or medical expenses, or to use in the event of an emergency. The amount you are eligible to borrow is dependent on the equity in your home. Here is an overview of HELOC credit requirements, as well as other requirements.
For a HELOC, a lender typically requires you to have at least 20 percent equity in your home. This may vary among lenders, with some accepting as little as 15 percent equity. When shopping for a lender, ask what percent of equity you must have built. Home equity is the market value of your home minus your mortgage and any other liens on your home. Using the value of your home and your outstanding liens, a lender will calculate your LTV (loan-to-debt ratio). This will help them determine whether you qualify for a home equity line of credit and how much you can borrow.
HELOC Credit Requirements – Credit Score
A good credit score is required for almost any loan you get. Your credit score may also affect the rate your lender will offer. Like your equity built, HELOC credit score requirements may vary among lenders, with some requiring 620 or above, others 700 or above, and others with different requirements. Before applying for a HELOC, you should always check your score and try to improve it. You can do this by checking the accuracy of your information, paying down balances, and making all your monthly payments on time. Lenders like to see a reliable payment history if they are going to take a chance on lending you money.
Debt-to-income ratio when applying for a HELOC
Your debt-to-income ratio is an important factor that lenders consider when you apply for a home equity line of credit. The lower your debt-to-income ratio, the better your chances are of being approved for your loan. This is yet another figure that will vary from lender to lender. When considering your HELOC credit requirements, this is an important factor. To determine your debt-to-income, a lender will total all your monthly debt payments and then divide that number by your gross monthly income. You can figure this out on your own with the calculation above, then work to improve it. Just like improving your credit score by paying down balances, you can also improve your debt-to-income ratio by paying down balances to lower your monthly payments due. Decreasing this ratio will improve your chances of qualifying for a great rate on a HELOC.
Even with equity built in your home, it may be hard to get a HELOC if you are out of work. Your income will play into the debt-to-income ratio we discuss above. If you have other steady forms of income, such as a pension or retirement, social security, rental income, unemployment, child support, or other income, it will all help to determine your eligibility for a loan.
Applying for a HELOC
If you are considering applying for a home equity line of credit, meeting the HELOC credit requirements mentioned above will ensure you have a good chance at being approved for your loan. Armed with this information you can work proactively to improve your chances of loan approval by improving your credit score and debt-to-income ratio among other things.
A home equity line of credit can provide you with a low-interest solution to access funds for any needs, from home remodel and repair to covering a large, unexpected expense. Benchmark FCU’s Ultimate HELOC provides members with a low introductory rate and the flexibility of two repayment options. Tap to learn more. Because credit unions focus on improving the financial well-being of our members, we take a more personalized approach to lending, focusing on the whole picture. Need more information? Stop by or speak to a Benchmark FCU representative.