A home equity line of credit (HELOC) is a homeowner's best friend, especially when it comes to major renovations.
As a form of revolving credit, a HELOC means you can use the funds as and when you need them, and only pay interest on what you use. Read on to find out about the most common HELOC requirements.
What Credit Score Do I Need?
First thing's first, you'll need to get your credit in shape before you apply for your HELOC. Ideally, you would aim for your score to be over 700, but around 620 could be sufficient.
You might qualify for a HELOC with a lower credit score but this may mean you'll be offered a higher interest rate (APR), a smaller loan amount, and a shorter term.
There are a few different factors that go into your credit score and your lender will likely look into these as part of the HELOC requirements.
History of Timely Debt Repayment
You probably know that your house serves as collateral for your HELOC, which is why you can often get more competitive rates than for an unsecured loan.
But you might not have considered the fact that a HELOC is considered a second mortgage, so your original mortgage would be first in line for payment in the unlikely scenario that your house was repossessed.
For this reason, it's in both you and your lender's best interests to make sure you can comfortably afford your HELOC. Your lender will look into any missed credit card payments and other items in your record that show you might not be able to meet your payments.
Types of Credit You Hold
To get a great credit score, you need to show a history of holding several different types of credit accounts, for example:
- Mortgage
- Credit cards
- Auto loan
- Personal Loan
If you've only ever held one type of credit, your score might be less than ideal and you'll be less likely to qualify for your HELOC. In this case, you could try and access a different type of credit before you apply for your HELOC.
Also, even though you own a home if you are applying for a HELOC, it’s possible you did so at a young age or other circumstances and don’t have much financial history yet. A lender might prefer you to wait to have a more proven track record of borrowing and repaying funds on time.
What Debt-to-Income Ratio (DTI) Do I Need?
Your DTI is the percentage of your gross monthly income that goes toward paying your debts each month. Lenders typically want this figure to be under 40% but the exact number may vary between financial institutions.
Use this equation to get your DTI ratio:
- Add up the total cost of your mortgage (including taxes and insurance)
- Add up any other official debts you have (credit cards, loans, etc.)
- Divide your total debt by your income (salary, wages, bonuses, and other forms of financial support)
For example: $1,500 (total mortgage) + $300 (car payment) = $1,800 / $5,000 (salary) = 0.36. So this person has a DTI of 36%, which means they might be approved for their HELOC.
Note that though your income is included in your debt-to-income ratio, some lenders may have a minimum income level to meet the HELOC requirements.
How Much Home Equity Do I Need?
Many lenders will need you to have built up a minimum of 15% to 20% equity in your home before you can qualify for a HELOC.
How to Calculate Your Home Equity
You can figure out your home equity with a simple equation:
- Find out the current market value (appraisal) of your home
- Subtract the current balance on your mortgage
For example: $400,000 (current value) - $300,000 (mortgage balance) = $100,000 home equity.
Typically, you might be able to borrow 85% of your home equity. Keeping some equity in your home protects you if the housing market dips and your home loses value.
How to Increase Your Home Equity
There are two main approaches to building home equity:
- Pay down your mortgage so you owe less on your home
- Renovate or add to your home to boost its market value
HELOC Requirements with Wasatch Peaks
Now that you know what you need to qualify for a home equity line of credit, you're probably wondering about details such as the credit limit (the total amount of funds available) and the draw period (how long you have to use the funds).
There are many moving parts when it comes to finding the right HELOC for your situation.
Getting pre-approved is the best way to determine exactly what amounts, terms, and rates are available for your credit score. Be sure to shop around your local credit union and other financial institutions to find the most competitive offer.
Wasatch Peaks offers competitive HELOCs that may meet your needs. Find out more today!
