Requirements for HELOCs: What to know

Using your home's equity is a smart move to reach your financial goals, tackle debt, or seize exciting opportunities. When it comes to accessing that equity, a home equity line of credit is one tool that can help you along the way.

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However, before you apply, it's crucial to understand the prerequisites involved. In this post, we'll discuss the key requirements for HELOCs, frequently asked questions, and alternatives to consider. 

How a HELOC works: A brief overview 

A home equity line of credit works like a credit card but is secured by your home equity. You'll have access to a revolving line of credit up to a predetermined limit over a draw period, typically ten years. You can access the funds as needed by writing checks, using a debit card linked to the HELOC account, or transferring funds online. 

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Interest is charged only on the amount borrowed, and payments are typically interest-only during the draw period. After the draw period ends, the repayment period begins, generally up to 20 years. The outstanding balance is then converted into a principle-plus-interest loan that's repaid through monthly payments. 

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Loan amounts are based on various financial health factors and how much equity you own, however the maximum is usually $500k. 

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Pros:

• There’s no restriction on how you can use your funds.
• Interest rates are typically lower than other debt products, like a personal loan.
• You can borrow only what you need. 

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Cons:

• You’ll have closing costs and fees to cover.
• HELOCs have variable interest rates, which create unpredictable monthly payments. 
• You risk foreclosure if you default on the loan.

A deep dive into HELOC requirements and eligibility 

HELOC CLTV requirements

Recommended CLTV: 80% of lower 

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One of the most critical HELOC requirements is an assessment of your property's value and the debt tied to it. The combined loan-to-value ratio (CLTV) compares the total loan amount against the property's appraised value, including any existing liens or mortgages.

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The CLTV provides lenders with insight into the level of exposure they face if you were to default on the loan. In addition to eligibility, it helps determine how much you can borrow. 

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CLTV is calculated by dividing the sum of the remaining balance owed on your mortgage and all the other loans tied to your property by the appraised value.

HELOC credit score requirements

Recommended credit score: 720 or higher  ‍

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As most homeowners know, a "good" credit score is a prerequisite for many financial products — HELOC requirements are no different. 

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A credit score highlights your ability to manage financial obligations and repay debts. A lender will review your score and credit history to gauge the likelihood of you defaulting on a loan or making late payments. 

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While eligibility requirements vary significantly from lender to lender, it's not uncommon for big banks to require a credit score of 720 or higher for home equity borrowers. Getting a HELOC with bad credit is possible, but you’ll likely be offered higher interest rates. Some lenders will work with borrowers whose credit scores are as low as 680. 

HELOC DTI requirements

Recommended DTI: 45% or lower

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While high credit scores will put you in a lender's good favor, another factor that will significantly improve your application is a low debt-to-income (DTI) ratio. 

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Your DTI ratio highlights how much of your monthly gross income is committed to existing debt obligations. A lower DTI shows financial responsibility, as less of your cash flow is tied to debt. It also helps you secure a better rate. ‍

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Fannie Mae and Freddie Mac set the 45% requirement. As a result, homeowners with a DTI higher than 45% will face challenges going through the underwriting process. 

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You can calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income. Then, multiply the result by 100 for a percentage. It's important to note that your debt does not include discretionary expenses like food or phone bills.

HELOC income requirements

There are no set income requirements. Generally, you'll want sufficient income to keep your debt-to-income ratio lower than 45%. However, lenders can ask for proof of stable income through pay stubs or tax returns. Income from contractor work may also be treated less favorably than W-2 income. 

Lien considerations

It's not uncommon for homeowners to have multiple home equity products tied to a single property. However, most HELOC lenders will not take a third-position lien on your property. This simply means you may have to pay off any other debts tied to your home with your HELOC funds.  

Other considerations

Lenders also consider your previous history with mortgages when evaluating you against their HELOC requirements. For example, you likely won't receive loan approval if your recent account includes bankruptcy, foreclosure, or a short sale. 

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Ultimately, documents vary from lender to lender. However, be prepared to provide:  

• Bankruptcy history
• Foreclosure history
• Recent delinquencies
• Property tax documentation 

HELOC alternatives

Home equity loan

A home equity loan allows you to tap the equity in your home for a lump sum of cash. Unlike HELOCs, home equity loans provide a one-time payout. Repayment begins almost immediately and consists of fixed monthly payments over a 5 to 30-year repayment term. 

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Eligibility: 

• CLTV: 80-85% or lower
• Credit score: 620 or higher
• DTI: 43% or lower

Pros:

• Fixed interest rates
• Lump sum of cash

Cons:

• Extra monthly payment
• Risk of foreclosure

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a larger one and lets you keep the difference (in cash). The new mortgage typically has a new interest rate and repayment terms, which may differ from the original.

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Cash-out refinances only make sense when you can secure a lower or equal rate. Otherwise, you may pay hundreds or even thousands of dollars in interest payments. 

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Eligibility: 

• CLTV: 80% or less
• Credit score: 620 minimum
• DTI: 45% or less

Pros:

• Access to a lump sum of cash
• No secondary monthly payments

Cons:

• Potential to refinance into a higher rate
• Risk of foreclosure 

Home equity investment 

A Home Equity Investment (HEI) gives you a lump sum of cash in exchange for a small share of your home’s future appreciation. There are no monthly payments. Instead, your investment is due at the end of the 30-year term—though you can buy back your equity at any time. 

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Eligibility:

• CLTV: 70% maximum
• Credit score: Above 500
• DTI: Varies by individual FICO score

Pros:

• No monthly payments
• Flexible eligibility requirements
• Long repayment term

Cons:

• Balloon payment 
• Risk of foreclosure

Frequently asked questions

Does a HELOC require an appraisal?

Yes, HELOCs require an appraisal to determine the current market value of your property. The appraisal helps lenders assess the amount of equity available in your home, which influences the credit limit they're willing to extend. 

How long does it take to get a HELOC?

Equity financing timelines tend to vary from provider to provider. Generally, the HELOC process can take anywhere from two to six weeks from application to closing.

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However, the lender's processing speed, how quickly you can submit the requested documents, and your individual situation will ultimately determine how long it takes. 

How much does a HELOC cost? 

The final cost will vary, but some common expenses to account for include:

• Credit report fee: $17–$75
• Title search fee: $100–$450
• Appraisal fees: $300–$450
• Closing costs: 2-5% of your loan amount

Can you get a HELOC on an investment property?

Yes, it's possible to get a HELOC on an investment property. However, eligibility criteria and terms are more stringent than those for obtaining a HELOC on a primary residence. Lenders may have stricter requirements and offer different loan-to-value ratios and interest rates for investment properties. You may also have fewer lenders to choose from, as some banks may not offer HELOCs in these circumstances. 

Final thoughts

While requirements for HELOC lending vary from provider to provider, there are general guidelines lenders will assess to determine your eligibility. By ensuring your financial health is in good shape and you own enough equity in your property, you can streamline your way to funding. If you're on the brink of eligibility, consider exploring other products that may fit your needs better.

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Tap into your home wealth with a Home Equity Investment from Point. HEIs offer flexible eligibility requirements, and you'll never have to make a monthly payment. See how much you could prequalify for with no impact on your credit. 

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