A home equity line of credit (HELOC) provides an exceptional opportunity for property owners to leverage the equity they have in their home to use for virtually any other need inexpensively. These are lines of credit, which means you can borrow as much as you need up to your limit, repay it, and borrow again.
While these loans are valuable, understanding HELOC requirements is critical to ensuring you put forward the best application. At Island FCU, we work closely with you to ensure you meet the HELOC loan requirements when you meet with us. Contact us now to find out how you can use home equity for your goals.
What is a HELOC
A HELOC is a financial product that allows a homeowner to tap into their home’s equity. Equity is the value of your home over and above your existing mortgage loan. If your home, for example, is worth $250,000 and your current mortgage loan balance is $150,000, you may have as much as $100,000 in available equity.
What a HELOC does differently from traditional home equity loans is to offer a line of credit, much like that of a credit card. The credit limit is typically a percentage of the home equity you have in your home. Your credit history, income, and other factors may also be a factor in HELOC qualifications.
HELOCs are types of secured loans, which typically offer lower interest rates compared to many unsecured loans, such as credit cards. The reason for this is that your home acts as collateral, reducing the risk for the lender and consequently your cost. Should you open a HELOC now? To find out, consider how it may work for your financial situation and needs.
How Does it Work?
Once you learn how to qualify for a HELOC and receive approval, you can then set up access to have your fund available.
A HELOC’s fee is in the form of interest, like most loans. The interest rate is calculated on your current balance. This is typically calculated on an average daily balance, which is different from an annual percentage rate. The average daily balance is the total balance for each day within the billing cycle and then divided by the total number of days within that cycle.
Another factor that plays a role in HELOCs is the draw period. That is the length of time when the credit line is open and available to you to borrow from. The draw period may differ from one offer to the next but may be as long as 10 years. During that time, you only pay interest on the amount of money you use on the loan.
Don’t confuse the draw period – the amount of time you can borrow from the loan – with the repayment period – the amount of time you have to repay the loan.
Benefits of a Home Equity Line of Credit
You can use the funds from a home equity line of credit in any way that fits your needs. Typically, there is no restriction on use. Some people may use it for home renovations, education expenses, or debt consolidation. With a potentially lower interest rate than what you are paying on unsecured credit cards, this could save you some money.
The flexibility in HELOCs is in their structure. It’s possible that you only have to pay the interest during the draw period. That means your monthly payment is likely to be very low and affordable. Because of this, you can use the funds for various goals that fit your needs. More so, you can use this loan for multiple needs over time, and you don’t need to apply for a new loan every time you do so. Simply continue to borrow from your HELOC up to your limit.
Flexibility in Borrowing
Consider how you may use a HELOC. You meet the HELOC credit score requirements, income requirements, and other terms. The lender offers you a $25,000 HELOC. You use the funds initially to remodel your home, adding a new addition to the property giving you the ability to enjoy your home more fully (and even adding value to it). You can then repay the amount you borrowed over the next few years and borrow more funds when it’s time to get a new roof for your home.
Do the same thing with debt, a dream vacation, buying a second home (use these funds to help build up your down payment for a second home), or other goals. You can borrow, repay, and borrow again throughout the draw period.
Potential Tax Advantages
Because a HELOC is a mortgage loan, you may qualify for tax deductions on the interest you pay on this loan. Speak with your accountant or tax professional to determine if you’re eligible to take advantage of these deductions.
Lower Interest Rates
Though many factors play a role in what you will pay based on HELOC qualifications, interest rates are typically lower on these loans than on unsecured loans. That means if you use these funds to pay off other debt you have with a higher interest rate, you end up saving money.
Some loans have variable interest rates, which can be lower than the fixed interest rate on other loans. That makes HELOCs desirable to those looking for a fast infusion of money at a low rate.
Requirements for Obtaining a HELOC
Now, the key is finding out if you have the qualifications for a HELOC. To learn how to qualify for a HELOC, consider the following.
Maintaining Sufficient Home Equity
First, you need equity. Equity builds over time as you pay down your mortgage. If your home’s market value increases, that also expands the amount of equity available to you.
Some lenders offer specialty HELOC programs that can allow you to borrow up to 100% of your home’s value. Based on your specific needs, speak to your local credit union about loan to value (LTV) and what programs are available to you. [TA3]
Credit Score Considerations
Credit scores help lenders determine if borrowers are a good credit risk. The HELOC credit score requirements differ from one lender to the next. Typically, a higher score means more availability of these loans and lower interest rates.
Debt-to-Income Ratio Requirements
Lenders also need to know what your debt-to-income (DTI) ratio is. This is the amount of debt you have compared to the amount of income you have. Individual creditors set DTI ratio benchmarks.
Steady Income and Employment History
You’ll also need to show lenders you have the necessary income stability to qualify for these loans. Lenders expect to see a consistent income source. A stable employment history lacks any big gaps in employment as well.
Payment History and Creditworthiness
Your past payment history with your existing mortgage loan and other debts also impacts your creditworthiness. Lenders want to see that you can make payments on time all of the time. If you have a history of late payments on your credit report, that may impact your eligibility to obtain a loan, depending on when those occurred.
Additional Factors to Consider
There could be other factors to consider to meet the HELOC qualifications set by the lender. This may include:
- References from others
- Income requirements
- A home that appraises well (you cannot borrow more than the value of the home)
The qualifications for a HELOC change between lenders. Be sure you speak to the lender to know what to expect.
Appraisal and LTV Ratio
An appraisal by a third-party provider may be a necessary step in obtaining these loans. The appraiser uses information about homes recently sold in your area to determine the value of your home in today’s market conditions. The overall size, features, and condition of the home matter, but changing market conditions can also play a role.
The loan-to-value (LTV) ratio of the loan directly impacts your borrowing limit. That means you want to be sure your home appraises for the highest value possible. Be sure it is show-worthy before getting the appraisal completed.
Loan Amount and Credit Limit
Lenders will determine the amount they can lend based on all of this information about the property and your credit[TA6] & income. You may be given a range of options. Choose the limit that works to meet your goals now and into the future. Borrowing more than you need is a way to create a bit of a safety net, as long as you use the funds wisely.
Interest Rate Structure and Terms
When choosing a lender and loan, be sure to consider the interest rate structure and terms. The difference of just a few percentage points can mean thousands of dollars in savings over the lifetime of the loan. Also, note that interest rates can differ based on how large the credit limit is, and other potential factors. Speak with your lender to compare several options.
Alternatives to a HELOC
If you’re unsure if you meet the HELOC requirements, you may wish to consider several other options.
Home Equity Loan
A home equity loan is much like a HELOC but does not have the continuous credit limit feature. Most home equity loans will be structured more like your mortgage, with a single disbursement of funds that you pay back over time.
Cash-Out Refinance
You may benefit from a cash-out refinance if you want to refinance your existing loan. If you qualify for a lower interest rate, it may be possible for you to refinance your existing loan into a new one with lower interest and better terms.
A cash-out refinance is a brand-new loan, which may mean extending your credit repayment period. However, if your existing monthly payments are too high, this is one way to get into a better loan for your needs if you qualify.
Personal Loan
A personal loan is a type of unsecured debt, which means that it’s not based on any collateral, including your home. These loans typically have a higher interest rate than secured loans.
FAQs
How often can the interest rate change on a HELOC?
Depending on the loan terms, rates can change as often as every month.
What are the repayment options for a HELOC?
Repayment options for a HELOC can range, providing the borrower with greater flexibility.
Are HELOCs easier to qualify for than traditional mortgages?
It could be easier to obtain if you have equity and meet the other requirements of these loans. You are likely borrowing far less and have a track record of consistent payment with your existing loan.
Is it possible to get a HELOC without a job?
Typically, lenders want to ensure you have a stable income to repay the debt.
What documentation is required for a HELOC application?
You’ll need to provide proof of your identification, income reports, employment records, and details about your existing home loan.
Final Thoughts
Now that you know how to qualify for a HELOC, the next step is to apply. However, take the time to compare lenders and terms. Make sure you have a detailed understanding of the terms and conditions, but also how you will use these funds and how repayment could impact your financial health. For many, the low cost can be one of the best reasons to apply for a HELOC.
Get a HELOC with Island Federal Today!
Island Federal Credit Union can help you qualify for home equity loans. We encourage you to learn about the current rates on HELOCs we offer and then contact us to apply for a loan that meets your goals. Contact us now to learn how.