HELOC qualification calculator

Are you looking for a low-cost, flexible way to borrow money? Many homeowners find that a home equity line of credit (better known as a HELOC) is the perfect solution, whether they’re looking to fund a DIY renovation project, start a new business, or enjoy extra peace of mind from having another financial buffer.  

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However, as with any financing solution, you’ll need to qualify first, and the amount you can borrow may vary. Each lender sets its own specific requirements, but there are many commonalities across lenders. We’ll delve further into what’s required and provide you with an easy-to-use HELOC qualification calculator so you can make a confident decision about what’s best for your family.

How a HELOC works

A typical HELOC functions as a two-part series: a five- to 10-year draw period, and a 10- to 20-year repayment period. You’ll be able to borrow money as you wish during the draw phase, up to your pre-approved credit limit, similar to a credit card. During this time, you’ll only be required to make interest-only payments unless you want to replenish your credit limit so you can borrow again — in which case, you’ll need to pay beyond the minimum.

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You’ll only be charged interest during the draw period if you borrow money. This is a big selling point for many homeowners since you won’t pay interest if you’re not currently borrowing anything. You may owe other fees, however, such as annual fees or draw fees (when you’re ready to borrow). You can use these funds for whatever you want, another great benefit considering that no one knows what the future holds (and what expenses it might bring).

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After the draw period ends, your HELOC will transition into the repayment phase. You won’t be able to borrow any more money during this time, and you’ll instead shift to paying off any remaining balance on your HELOC with monthly payments that go toward principal and interest, just like your mortgage. Some lenders allow you to renew your HELOC at this point, however, so you can begin to borrow money again.

How HELOC repayment works

It’s important to understand how the HELOC repayment process works since it’s very different from a regular loan. This can help you avoid any surprises and make sure there aren’t any friction points in your budget.

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We’ve covered how a HELOC monthly payment may change between the draw period, with interest-only payments, and the repayment period, with full interest and principal payments. Your payment may be much larger during the repayment phase, depending on how much you’ve borrowed.

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However, it’ll also shift over time due to another HELOC feature: variable interest rates. The entire time you have a HELOC, your rate may be constantly adjusting depending on broader economic conditions. This can introduce even more variability in how much you’ll need to pay each month. Your HELOC agreement will set the terms for how much — and how often — your interest rate may adjust, based on the current prime rate.

HELOC requirements

In order to qualify for a HELOC, you’ll need to meet your lender’s requirements. Some lenders have strict qualification requirements and offer better terms to those who can meet them. Other lenders are more open to working with homeowners who may not have the best HELOC qualifications but are willing to pay a higher interest rate.

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Most lenders, however, require the following things:

Credit score

You’ll generally need a credit score of at least 620, although many lenders are more flexible when it comes to having bad credit. Note that most lenders will check your FICO score, which may be different than the VantageScore offered by most free credit score websites.

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Combined loan-to-value (LTV) ratio

Most lenders require a combined LTV ratio of 80% or less. This is calculated by adding up all of the debts secured by your home — including your mortgage and your potential new HELOC — and dividing it by the appraised value of your home. If your home is only about 80% paid off, for example, you may already be tapped out when it comes to home equity financing. Some lenders do offer financing with an LTV ratio up to 100%, however.

Debt-to-income (DTI) ratio

Most lenders will require you to have a DTI ratio of 45% or less to qualify. You’ll calculate this by adding up all of your minimum monthly debt payments and dividing it by your pre-tax monthly income. Remember to include any loans you may have co-signed for, such as your children’s student loans or an auto loan since lenders still include this in your own DTI ratio calculation. Lenders use this to make sure you’ll be able to afford payments on a new loan, and that you don’t end up in a situation where you’re house rich, but cash poor.

How to use the HELOC qualification calculator

Enter the following details into the HELOC qualification calculator. Take some time now to look up the exact numbers so that you can get the most accurate results:

• Current home value: How much your home is currently worth. Websites like Zillow and Redfin can provide estimates. You can also get an estimate when you check your qualification for a Point HEI here.
• Mortgage outstanding balance: How much you have remaining on your current mortgage, plus any other debts secured by your home such as a home equity loan.
• Credit score range: Some banks and credit card issuers provide customers with free FICO score updates, you may also obtain a free credit report directly from a credit reporting agency, or https://www.annualcreditreport.com/.
• Monthly income: How much you and any joint borrowers earn each month before taxes are taken out.
• Monthly expenses: Your total monthly minimum debt payments, including for any co-signed loans.

A home equity loan works similarly to a HELOC, except it’s disbursed as a lump sum. Lenders tend to offer even lower rates on home equity loans — and they’re fixed rates, so your monthly payment won’t change over time. Home equity loans may be especially useful for one-time-only projects, such as installing solar panels on your home or for debt consolidation.

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Point’s HELOC qualification calculator will then show you an estimate of how much you may be able to borrow with a HELOC based on your home equity, although keep in mind that lenders may vary. It’ll also show your LTV and DTI ratios, which you can use as you shop around to see which lenders you may qualify with.

How the HELOC application process works

Taking out a HELOC requires a bit more legwork than, say, a personal loan, but it’s generally much quicker than a mortgage. In general, you can expect it to take between two and six weeks, depending on the lender and your home. Here’s how it works:

1. Get pre-qualified

Most lenders allow you to check your eligibility and potential terms for a HELOC by answering a few questions on their website. You’ll need to provide your information so they can perform a soft credit check, which doesn’t impact your score. It’s best to do this with at least a few different lenders so that you can compare offers to get the best rate.

2. Submit a full application

Pick the offer that you’re happiest with and submit a full HELOC application with that lender. You’ll generally need to submit documentation such as your proof of ID, as well as financial details such as recent pay stubs, bank account statements, mortgage statements, tax returns, etc.

3. Complete lender underwriting

Your HELOC lender will generally require a current appraisal to determine the exact amount of equity in your home. This may be done remotely or in person, depending on the lender. Your lender will also work to verify your home’s title, any liens filed against your home, etc., to clear the path to approving your HELOC. Stay in close contact with your lender during this time so you can respond quickly to any requests, which will speed up the process.

4. Sign final paperwork

If you’re approved, you’ll get access to the closing papers and loan agreement in advance of signing them. Make sure you read through everything so you’re comfortable knowing how your HELOC works. If you’re still happy with the terms of the agreement, you’ll sign the contract and get access to your new HELOC.

When is a HELOC a good idea?

In order to make sure a HELOC is the right fit for you, consider how well you fit into the following scenarios:

• You want quick access to funds: A major HELOC advantage is having access to funds immediately, without having to wait for the turnaround time in applying for another loan.
• You’re able to handle varying payments: Having a lot of extra wiggle room in your budget is a good idea so that you can easily afford the monthly payments as they rise and fall over time with variable rates.
• You’re using the funds for wise purposes: You can use HELOC funds for nearly anything, but some uses are better than others, such as renovating your home to boost its value or paying off high-interest credit card debt.
• You’re confident in your ability to repay the HELOC: If you default on the HELOC, you may lose your home to foreclosure. Therefore, you’ll want to be sure you can repay the debt before you take it out because it’s not just your credit that’s at stake.

HELOC alternatives

HELOCs are incredibly popular, but they’re not right for everyone. Consider whether one of these alternatives would work better for you before applying for a HELOC:

Home equity loan

Cash-out refinance

A cash-out refinance loan replaces your current mortgage, plus you’ll get a lump sum of cash too. In return, your mortgage balance will be higher than you currently owe. It’s sort of like taking out a home equity loan and a mortgage refinance at the same time, wrapped together into one loan amount. If you’ve been meaning to refinance your mortgage anyway, this could be a good way to accomplish both objectives at once.  

Home equity investment

A home equity investment is a financing option that allows you to receive a lump sum today in return for a percentage of your home’s future equity. There are no monthly payments to make in the meantime, and you’ll repay the funds in one single balloon payment in 10 to 30 years' time. Qualifying is generally easier than qualifying for a HELOC or a home equity loan.

Frequently asked questions

Can you get a HELOC with bad credit?

Yes, it’s possible to get a HELOC with bad credit. However, your HELOC costs may be higher.

How much does a HELOC cost?

The closing costs on a HELOC typically range from 2% to 5% of your approved credit limit. Once open, your costs can vary a lot depending on whether you’re in the draw or repayment phase of your HELOC, how much of your credit line you’re currently using, and how the broader economic environment is driving your interest rate.  

Can you refinance a HELOC?

Yes. You may be able to refinance your HELOC for a new one or use another financing option, such as a home equity loan or home equity investment, to pay off your current HELOC.

Can you take out a HELOC on an investment property?

Yes, although fewer lenders offer this option than for personal properties. Lenders typically charge higher rates and fees for HELOCs on investment properties as well.

Final thoughts

Your home allows you a lot of freedom and flexibility, and you can amplify that further by taking out a HELOC. Using the HELOC qualification calculator, you can determine whether you’re likely to qualify, and, if so, what your potential loan amount may look like. If you’re not eligible, however, or if you prefer having even more payment flexibility, consider whether a home equity investment may be right for you.

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