Are you a homeowner wanting to make some much-needed home improvements? A proud parent wondering how to pay pricey (but worthy) college tuition? Or just a financially savvy individual looking to pay off or consolidate other debts?
You might be a great candidate for a home equity line of credit (HELOC). A HELOC gives you access to a relatively large amount of credit (usually around 80% of the equity you have in your home) that you can put to good use!
If that sounds like a good deal to you, read on for an explanation of major HELOC requirements.
5 HELOC Requirements To Consider Before Applying
Before you apply for a HELOC, make sure you meet most—if not all!—of the major requirements. After all, why would you want to fill out application paperwork when you know you might have some credit improvements to make?
1. Have 15% to 20% equity in your home
Just because you’re a homeowner doesn’t mean you have equity in your home. Equity is how much of your home you actually own. In other words, it’s how much of your mortgage you’ve paid off.
To find the percentage of the equity you have in your home, you first need to calculate your loan-to-value (LTV) ratio. The LTV ratio explains how much you still owe on your home. To find your LTV, you just need to know two numbers:
- How much you still owe on your home
- The current value of your home
Say, for example, you owe $200,000 on your home and your home is valued at $800,000. Your LTV is the balance of your loan divided by the value of your home. So in this case, your LTV is 75%.
Since equity is the percentage of your home you own, you have to subtract the percentage of what you owe. So in our example above, your equity is 25%. (If you aren’t a math whiz, our UMe team members are happy to help you with this!)
Good news: That’s enough for most lenders to consider your HELOC application!
2. Have a strong credit score
Just like any other credit application, lenders will consider your credit score to figure out how risky it is to loan you money. And as with any extension of credit, the higher your credit score, the easier it will be to get approved for a HELOC.
A higher credit score will typically also qualify you for better credit rates and more competitive repayment terms. Generally, a score of 700 or above makes approving you for a HELOC a no-brainer.
3. Provide proof of income
Bringing in a solid income is another good indicator that you aren’t a risky borrower. Similar to a credit score, a higher income will make you a more appealing candidate for a HELOC. But different lenders will have different definitions of “enough” income to support timely HELOC repayments.
No matter what your income is, you will likely be required to present proof of your regular income in the form of W2s, pay stubs, or tax returns.
4. Have a reasonable debt-to-income (DTI) ratio
Simply bringing in an income isn’t enough to qualify you for a HELOC. You’ll also need to keep your overall debts — and the total amount of your debts compared to your income — at a reasonable level.
That’s where your debt-to-income ratio comes in. To calculate your DTI, figure out your monthly recurring debt payments. That includes, for example, your mortgage payments, any other loan (student, vehicle, personal, etc.) payments, and existing credit card debt payments. Divide your monthly income by your total monthly debt payments, and you’ve got your DTI.
Different lenders will have different definitions of a “reasonable” DTI. But a good rule of thumb is to keep your DTI at or below 43% to qualify for a HELOC.
5. Demonstrate reliable repayment habits
No matter your income or total accumulated debt, it’s important that you make regular, on-time payments to pay back your debt.
A history of reliable repayments shows that, even if you’ve taken out a few loans or have some credit card debt lying around, you manage to pay back what you owe. But, if you have a history of missed or overdue payments, a lender might assume that you’ll also make late HELOC payments.
What To Do If You Don’t Meet HELOC Requirements
Most of these requirements will differ based on the lender issuing your HELOC. So, if you find you don’t meet one lender’s requirements, you can always shop around for an opportunity that’s more compatible with your financial situation. Here at UMe, we always want to make sure that any loan we approve is in our member’s best interest, first and foremost, because we really care about U!
In general, time paired with some good financial habits will help you qualify for a HELOC. However, if you aren’t in the position for qualifying now, there are things you can do to that will help you get there, like the following:
- Make more mortgage payments to gain more equity in your home.
- Pay off other existing debts to bring up your credit score, and decrease your DTI.
- Find ways to boost your income.
- Make on-time payments on any existing loans or debts.
And if you need access to money quickly, you can also consider other types of loans or credit. You might be able to get approved for a credit card, for example, that will give you funds in the form of revolving credit. While it won’t give you access to the same amount of credit as a HELOC, you can still use it to make smaller necessary purchases.
Ready To Apply For A HELOC?
If you think you meet our HELOC requirements, we’ve got good news! At UMe Credit Union, you can borrow up to $400,000 at a highly competitive 12-month introductory rate of 2.99% on HELOCs.
Click the button below to see if a UMe HELOC is right for you.
Learn more about HELOC