How to qualify for a home equity line of credit (HELOC)

Home equity loan vs. HELOC

If you're a homeowner, you may have access to two different types of loans that you can use for home improvements, debt consolidation, or other purposes: a home equity loan or a home equity line of credit (HELOC).

Home equity loans and HELOCs use your home's equity as collateral. However, there are some key differences between the two that you should be aware of before deciding which one is right for you.

With a home equity loan, you borrow a lump sum of money and then make fixed monthly payments over a set timeframe. The lump sum makes home equity loans ideal for large projects you need to pay off in a specific timeframe.

HELOCs work differently. Instead of borrowing a lump sum, you receive a line of credit that you can draw from as needed. This makes HELOCs more flexible than home equity loans, but it also means that your monthly payments can fluctuate depending on how much you've borrowed.

Both home equity loans and HELOCs have their own advantages and disadvantages, so it's important to weigh your options carefully before deciding which one is right for you.

READ MORE: Home equity loan vs Home equity line of credit (HELOC)

Requirements: Qualify for a HELOC

A HELOC can be a great way to access money when you need it, but not everyone is eligible. Here are common requirements to qualify for a HELOC.

Have enough home equity

To qualify for a HELOC, you must have equity in your home. Equity is the portion of your home you own outright, without any loan or mortgage balance remaining. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

Have a good credit score

You will also need a good credit score to qualify for a HELOC. A higher credit score means you are less of a risk to lenders and will be more likely to qualify for a loan with favorable terms.

Maintain a low debt-to-income ratio

One of the requirements to qualify for a HELOC is to maintain a low debt-to-income (DTI) ratio.

Your DTI ratio is the amount of your monthly debts, including your mortgage payment, divided by your monthly income. Lenders typically want a DTI ratio of 43% or less, although specific requirements vary from lender to lender.

Show proof of income

When you apply for a HELOC, the lender may require income verification. Verification might include documentation of your income, including pay stubs or tax returns. The lender can use this information to determine whether you can repay the loan.

How much can you borrow with a HELOC?

A HELOC, or home equity line of credit, is a versatile financial tool that can give you substantial borrowing power. But the amount you can borrow with a HELOC depends on a few factors, including the value of your home and the amount of equity you've built up.

In general, you can typically borrow up to 90% of the value of your home including any outstanding mortgage balance. For example, if the value of your home is $500,000 and you have an existing mortgage balance of $250,000, you may qualify for a HELOC worth $200,000.

However, it's important to remember that the amount you can borrow varies depending on your lender's requirements. It’s also worth noting that you don't have to borrow the entire allotted amount.

What are HELOC alternatives?

If you don't qualify for a HELOC or think the product is wrong for you, there are some alternatives. While these alternatives work differently, they still offer many of the benefits of a HELOC.