How to Qualify for a Home Equity Line of Credit
Life may be a bit unpredictable these days, but if you're a homeowner, qualifying for a home equity line of credit (HELOC) may give you some peace of mind while you tackle any financial obstacle that comes your way.
A HELOC is a line of credit that uses your home's equity (the difference between what you owe on your home and what your home is currently worth) to help you pay for home improvement projects, your child's education or other expenses, like consolidating medical bills or credit card debt. This can also be a great way to pay for renovations, add on a home office or some extra space for your kids.
There is typically a "draw period" where you can withdraw money from your HELOC, and you only pay interest on the amount you actually use. This draw period varies by lender, WaFd Bank's draw period is 10 years. After that, you'll begin paying back what you borrowed. This is repaid with monthly payments which are amortized, or spread out, over a certain number of years (15 years through WaFd Bank).
Qualifying homeowners may be approved to borrow a certain amount of money and access funds as needed. For example, if you are approved for a HELOC of $10,000 you can choose to use part of it to pay off medical bills now and the other part to pay for a home office remodel later on. If you don't end up withdrawing any money, you won't owe anything and you will not have to make payments. WaFd Bank doesn't charge a yearly fee, but some lenders do, so be sure to ask about that before applying.
A HELOC that doesn't have annual fees can be much more affordable than making large purchases by credit card or starting another type of loan. Read on to learn how to qualify for a HELOC and the benefits of choosing WaFd Bank for your HELOC.
General HELOC Requirements
Although qualifications can vary by bank lender, one they all agree on is your credit score. You may still be able to get approved for a HELOC if your credit score is lower than the minimum required by the lender, just at a higher interest rate. Make sure to do your homework to determine if this is a cost-effective option based on your interest rate.
In addition to your credit score, bank lenders also look at your debt-to-income (DTI) ratio and your loan-to-value (LTV) ratio (how much you owe compared to the value of your home) when determining if you qualify.
- Affordable DTI ratio
Much like determining how much house you can afford to buy when qualifying for a mortgage, the DTI ratio helps lenders determine the maximum line of credit they can offer based on what you can afford. This ratio is determined by dividing your monthly debt payments by your gross income (the amount you make before taxes and other deductions). What is included in the monthly debt obligations varies by lender and may include home loans, car payments, student loans, minimum credit card payments and other expenses. Aim for a DTI ratio of 30% or less when considering a HELOC. - Good LTV ratio
Bank lenders will look at how much equity is in your home before making a decision to approve you for a HELOC. To do this, they will assess your current loan to value ratio (a percentage calculated based on your current mortgage balance divided by your home's current appraisal value). Lenders often look for ratio up to a specific amount, which varies but is generally around 80%. For example: If your home is worth $100,000 and you owe $70,000, your LTV ratio is 70% and you may qualify for a HELOC. - Lien Position
If you don't own your home free and clear, then your mortgage lender is considered to be in "first position". This means that when your home sells, your mortgage lender is the first to be paid back. If you have or are thinking about getting a HELOC, your HELOC lender (which can also be your mortgage lender) would be in second lien position, or second place to be paid back. Generally, lenders will not approve a HELOC unless they will be in first or second lien position. - Combined Loan-to-Value (CLTV)
If you have a mortgage and a HELOC already but are looking to get a second HELOC or a home equity loan, the lender will take into account your combined existing property loans and compare them to the value of your property. From there, they'll determine whether you qualify for another loan or line of credit. Limits are different than LTV and vary by lender.
Check out WaFd Bank's HELOC calculator to quickly estimate your interest-only payments based on your estimated HELOC.
Choosing WaFd Bank as Your HELOC Lender
If you are interested in learning more or applying for a HELOC, WaFd Bank is here to help. We offer:
- HELOCs for primary homes, second homes and investment properties (this includes jumbo HELOCs up to $700,000)
- No annual renewal fees
- Competitive interest rates (and a 0.25% discount off your interest rate for automatic monthly payments from any WaFd checking account)
- Interest-only payments for 10 years
- Zero closing costs for owner occupied and second home clients with existing home loans through WaFd Bank seeking up to $250,000 in lines of credit
Find a loan officer near you to see if a HELOC is right for you or to learn more about our other home loan solutions.
All loans subject to credit approval. Texas HELOCs: Notice concerning extensions of credit defined by section 50(a)(6), article XVI, Texas constitution: Section 50(a)(6), article XVI, of the Texas constitution allows certain loans to be secured against the equity in your home. Such loans are commonly known as equity loans.
