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If you need access to cash and have gained a significant chunk of equity in your home, you’re in luck: You can use a home equity line of credit (HELOC) to tap your equity and use the money to pay for whatever you want, from home improvements to college courses.
However, you must meet specific criteria to get approved for a HELOC. Here’s what to know about how to qualify and apply for a HELOC.
In this article:
What is a HELOC, and how does it work?
A HELOC, or home equity line of credit, is a type of second mortgage, so you’ll have your first mortgage and HELOC simultaneously. It’s a revolving form of credit that lets you borrow against the equity in your home. Equity is the difference between your house’s current market value and the amount you owe on your original mortgage.
A HELOC functions similarly to a credit card. You can access as much or as little money as you need, up to a certain limit. However, unlike a credit card, HELOCs use your home as collateral, which means you could risk foreclosure if you fail to make monthly payments.
A HELOC has two distinct phases: the draw period and the repayment period.
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The draw period. The draw period typically lasts 10 years. You can make withdrawals from your line of credit during the draw period as needed. Each HELOC lender works differently, but you’re often required to make monthly interest payments during the draw period.
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The repayment period. Once the draw period ends, your HELOC will transition into the repayment period, commonly lasting up to 20 years. During this timeframe, you’re not allowed to withdraw any more funds, and you’ll have to start making payments toward both the principal and interest.
HELOC requirements
Not every homeowner qualifies for a HELOC. Here are the requirements you’ll have to meet to take out a home equity line of credit:
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Home equity. Most lenders will require you to have accumulated at least 15% to 20% equity to be eligible for a HELOC.
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Credit score. Credit score requirements vary by lender. However, you typically need at least a 680 FICO score to be eligible.
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Debt-to-income ratio (DTI): Your DTI ratio divides your total monthly debt obligations by your monthly gross income and expresses it as a percentage. Lenders generally like to see a DTI ratio of 43% or less for HELOC applicants.
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Proof of income. Though there’s no universal minimum income requirement for HELOCs, lenders will still require income verification to confirm you’re financially stable enough to repay the line of credit. They may want to see your pay stubs, W-2s, and tax returns to verify your income.
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Homeowners insurance. Since your HELOC is secured by your home, lenders have a financial stake in it. They’ll require proof that you have homeowners insurance to cover the property in case of unexpected events, like a fire or burglary, to protect their investment.
Learn more: 7 ways to build equity in your home
How to get a HELOC: Step-by-step
Getting a HELOC is pretty straightforward. Here’s a quick step-by-step guide on how to get started.
1. Consider your personal finances
Before applying for a HELOC, make sure you’re financially able to take on additional debt and that your credit score is high enough to qualify.
If you don’t know where you stand in terms of your credit health, you can get free weekly credit reports from the three credit bureaus: Experian, Equifax, and TransUnion. You may also want to talk to a financial advisor or counselor to help decide if a HELOC makes sense for your financial situation.
2. Choose a lender
You can find HELOCs at most financial institutions that offer home loans, from your local bank to national lenders. But don’t just go with the first one you see. Compare terms, rates, eligibility requirements, and closing costs from at least three mortgage lenders to find the best HELOC lender for your situation.
3. Gather your information
Once you’ve found a lender you want to work with, it’s time to gather and organize all the documents you’ll need to complete the application. Lenders may ask you to provide information such as proof of income, a recent mortgage statement, a government-issued photo ID, and proof of homeowners insurance. Check your mortgage lender’s website for more details.
4. Fill out the application
Next, fill out the application using the information you’ve gathered above. Some banks and credit unions allow you to apply online or over the phone, while others may require you to do it in person.
5. Go through underwriting
In the underwriting process, the mortgage lender verifies your financial information, evaluates your home’s value, and assesses your ability to repay the HELOC.
Depending on your lender, the underwriting process can take several weeks. During underwriting, your lender may also order a home appraisal to determine your home’s market value.
6. Close on the HELOC
If your application is approved, you’ll close on the HELOC, sign the final paperwork, and agree to your line of credit terms. Your lender will outline your credit limit, repayment schedule, and interest rate.
Make sure you understand everything before signing on the dotted line. Once everything is finalized, you’ll receive instructions on how to access your money.
How long does it take to get a HELOC?
If you’re thinking about taking out a HELOC, you may be wondering how long it takes to get a HELOC approved. The short answer: around two to six weeks.
But the timeframe could also vary depending on the lender’s processing time and how quickly you can provide your lender with the required information and documents. If you’re in a time crunch, you can speed up your HELOC application process by shopping for lenders that offer faster processing times and having your paperwork organized and ready to go.
Dig deeper: What documents do I need for mortgage preapproval?
How to get a HELOC: FAQs
How do I get a HELOC with bad credit?
Getting a HELOC with bad credit may be difficult since most lenders require a credit score of at least 680 to qualify. However, some lenders may allow you to take out a HELOC with a lower credit score if you have a lot of equity in your home or earn a high income.
How hard is it to get a HELOC?
Getting a HELOC should be relatively easy as long as you meet the eligibility requirements, such as having enough equity in your home and a good credit score.
Do you start paying on a HELOC right away?
Yes, but you’re usually only required to make interest payments during the HELOC draw period. Once the draw period ends and you enter the repayment period, you must start making monthly payments on both the principal and interest.
How much income do I need for a HELOC?
Though there isn’t a standard income requirement for HELOCs, most mortgage lenders will want you to have a DTI of 43% or lower. Your monthly gross income should be high enough to cover your total debt comfortably.
This article was edited by Laura Grace Tarpley.
