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HELOC with high DTI: A guide

Learn how to navigate getting a HELOC with a high debt-to-income ratio. Discover tips, challenges, and alternatives to secure the funds you need.

Siarra Ortiz
June 24, 2024

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HELOCs are a popular way to tap into your home equity for flexible financing. Whether you want to cover recurring expenses, tackle a specific goal, or need a financial buffer, a HELOC can help. 

Understanding how a HELOC works and navigating the application process is essential, particularly if you have a high DTI ratio. This post will explore how to get a HELOC with a high DTI and alternative options to consider.

How a HELOC works

A home equity line of credit (HELOC) is a loan secured by the equity in your home. Using your property as collateral, you can tap into your equity for a revolving line of credit that works similarly to a credit card. Lenders typically allow you to borrow up to 85% of your home’s equity, but your financial profile can impact this. 

You can draw funds as you need—up to a set limit—during the draw period, 5 to 10 years. During this time, you'll be responsible for interest-only payments. Once the repayment period begins, your balance will be converted into a principal plus interest loan. Then, you'll be on the hook for monthly payments over a 10 to 20-year repayment term. HELOCs have variable interest rates, meaning monthly payments may fluctuate. 

HELOCs offer a great deal of flexibility—you can tackle unexpected expenses or handle ongoing costs as you need, and will only ever pay interest on what you borrow. However, feeling confident about repaying the loan when the time comes is critical. If you default on a HELOC, you could lose your home.  

HELOC requirements

To qualify for a HELOC, you'll generally need:

  • Good to excellent credit: Typically 620 or higher.
  • Sufficient equity: You must own 15% to 20% of your home’s equity.
  • Sufficient income: This varies by lender. Generally, you’ll need verifiable and stable income—whether from traditional work, self-employment, or an alternative source like disability benefits
  • Low DTI: A DTI ratio below 43% is preferred.

Debt to income ratio: an overview

When applying for any type of financing, lenders will scrutinize your financial profile thoroughly—including your debt-to-income ratio (DTI). 

In simple terms, your DTI is the percentage of your gross (total) monthly income that goes towards paying off your debts. It provides lenders a glimpse into how your cash flows monthly and how much more debt you can realistically afford to take on. It’s favorable to have a lower ratio. A low DTI typically suggests that the borrower is less likely to overextend themselves financially with the addition of a new loan. However, getting a loan as a high debt-to-income borrower is not impossible. 

To calculate your DTI, add up your monthly debt payments, divide that number by your pre-tax monthly income, and multiply by 100. Make sure to include any fixed expenses like a mortgage, child support payments, student loans, as well as revolving debts like credit card balances.

For example, if your existing debts total $2,000 and your gross monthly income is $6,000, your DTI ratio would be calculated as follows: ($2,000 ÷ $6,000) × 100 = 33.3%. This means 33.3% of your income goes towards paying off debt each month. 

HELOC with high DTI: What to know

You can make more informed decisions once you understand the potential hurdles and impact of getting a HELOC with a high DTI. It’s important to understand you may face: 

  • Stricter requirements: Lenders may impose higher credit score thresholds and lower loan-to-value ratios.
  • Higher borrowing costs: You may face higher fees and interest rates to offset the perceived risk.
  • Fewer lenders: Finding high DTI HELOC lenders will require more effort and time—you’ll certainly have to prequalify. 

Tips for getting a HELOC with a high DTI 

  • Ask your local credit union: Credit unions are not-for-profit financial organizations. As a result, they tend to have more flexible lending criteria than traditional banks. A credit union may be more willing to work with you despite a high debt-to-income ratio—especially if you have a long-standing relationship with them. 
  • Prequalify where you can: Shop around and prequalify with multiple lenders. This will give you an idea of your eligibility and the terms you might receive, without impacting your credit score. It's also the best way to compare offers and secure the most promising one. 
  • Improve your credit score: A high credit score can make you a more attractive borrower, even with a higher DTI. Apply extra payments toward debts, make timely payments, and avoid new credit inquiries to increase your score. Consider checking your credit report to review and dispute any errors. 
  • Increase your income: Take on a side hustle or part-time job to boost your monthly cash flow, effectively lowering your debt-to-income ratio.  
  • Consider a cosigner: A trusted cosigner with excellent credit and low DTI can help improve your chances of approval. However, it's important to note that the cosigner agrees to take responsibility for the loan if you default. 
  • Wait and pay off debt first: If you have a weaker financial profile—high DTI, low credit score, low equity—qualifying for a HELOC may be out of the question. While frustrating, you can become a stronger candidate with just a few months of focusing on debt repayment. Alternatively, if you need money urgently, you can explore alternatives with easier thresholds. 

Alternatives to consider

Home equity investment 

Why it can be a good option: No DTI requirements 

Have a major expense to cover, a nest egg to bolster, or simply want to do away with monthly payments? A home equity investment (HEI) allows you to leverage your home wealth for a single lump sum payout. You get cash today, in exchange for a share of your home’s future appreciation. There are no monthly payments, rather you repay the investment anytime within a flexible 30-year term when you sell the home, refinance, or use another cash reserve.

The process is similar to that of a HELOC; after submitting your application, you’ll go through the underwriting process, get a home appraisal, and close. 

HEI requirements are less stringent than other products, making them a favorable option for borrowers with less-than-great credit or low income. They also benefit mortgage holders looking to access the equity in an investment property. 

  • Loan amount: Up to $500K
  • Time to fund: 3 to 8 weeks
  • Requirements: 500 credit score or higher, sufficient equity, home in an available location

Prequalify for an HEI without impacting your credit score or committing to applying. 

Cash-out refinance

Why it can be a good option: Lower DTI requirements

A cash-out refinance replaces your existing mortgage with a larger loan, allowing you to pocket the difference in cash. Since you’re effectively getting into a new mortgage, you’ll have a new rate and terms. Unlike a HELOC, a cash-out refinance doesn’t add an extra monthly payment. 

It’s a great way to lower your interest rate and monthly payments while boosting your cash flow—but only if you can secure a better rate. When rates are high, a refinance can cost you thousands of dollars over the life of the new loan. 

  • Loan amount: Up to 80% of your home equity
  • Time to fund: 6 to 8 weeks
  • Requirements: 620 credit score, 20%+ equity, maximum DTI of 40% to 50% 

Personal loan

Why it can be a good option: Lower DTI requirements

A personal loan provides a lump sum of money repaid in fixed monthly installments over a set term, 1 to 7 years. They are generally unsecured, meaning they don’t require collateral. However, you can apply for a secured loan to increase your chances of approval and loan amount or to score a better rate. 

Loans can be general, or you can work with a lender who offers tailored products, like home improvement or debt consolidation loans. 

  • Loan amount: $1,000 to $100,000
  • Time to fund: 2 to 5 business days
  • Requirements: Varies by lender; credit score as low as 500 for some lenders, sufficient income, DTI of 36% or less

401(k) loan

Why it can be a good option: Not based on creditworthiness

If you have a 401(k) account, it's worth exploring whether it's a good idea to borrow from yourself. Though experts generally advise against dipping into your future security, there are times when short-term needs justify it.

A 401(k) loan allows you to borrow up to a set percentage of your vested account balance from your retirement savings. You'll repay the loan and interest through payroll deductions over a 5-year term.

Before applying, it's best to consult with a financial advisor. Taking from your nest egg without a plan will quickly result in a retirement shortfall.

  • Loan amount: Up to 50% of your vested account balance, with a maximum of $50,000.
  • Time to fund: Varies by lender; days to weeks
  • Requirements: An eligible 401(k) plan

Pro-tip: A 401(k) hardship withdrawal can help you leverage your retirement account in cases of financial hardship. You won't be on the hook for repayment. However, they deserve the same caution as 401(k) loans, if not more, as you're not responsible for replacing the money in your account. 

Home equity loan

Honorable mention: DTI requirements are similar 

Another way to tap into your equity for a single lump sum payout is with a home equity loan. HELOCs and home equity loans have very similar requirements, so while it will also be challenging to get a home equity loan with a high DTI, it's not impossible. 

Home equity loans offer a repayment period of 5 to 30 years, during which you'll be responsible for fixed monthly payments. Interest rates are as competitive as HELOCs. 

Shopping around to prequalify for a home equity loan may increase your chances of securing the financing you need and may even get you a better rate than a HELOC with a high DTI. 

  • Loan amount: Up to 85% of your home equity
  • Time to fund: 2 to 4 weeks
  • Requirements: 620 minimum credit score, sufficient equity, sufficient income, DTI of 43% or lower 

When does it make sense to get a HELOC?

A HELOC can be a good idea if you:

  • Need flexible financing for ongoing expenses.
  • Have a strong financial profile to secure a reasonable rate.
  • Would like a deferred repayment period.

An alternative solution may be a better fit if you:

  • Don't qualify for traditional equity products.
  • Want to avoid monthly payments. 
  • Would like to change the terms of your mortgage.
  • Want a single lump sum payout. 

Final thoughts

A high debt-to-income ratio shouldn't keep you from accomplishing your financial goals. By ensuring the rest of your financial profile is strong, you can demonstrate your creditworthiness to HELOC lenders.

Alternatively, if you don't qualify or feel a different product may suit you better, it's worth exploring your options. Whether you opt for a HELOC or an alternative, it's crucial to fully understand the terms and implications. 

Take control of your finances with a Home Equity Investment from Point. There are no monthly payments or need for perfect credit. Prequalify today.

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