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Requirements for a Home Equity Line of Credit (HELOC)

A young Asian couple review requirements for a home equity line of credit online

When you have equity in your home, you can use it to get cash to pay for things such as college, home improvements, putting in a fence, family vacations, braces, etc. You can also use the cash to consolidate high-interest debts. So, how do you get access to that money?

One way to get cash from the equity in your home is with a home equity line of credit – also known as a HELOC. Read on to learn more about HELOCs and requirements for a home equity line of credit.

How HELOCs Work

HELOCs work similarly to traditional credit cards. You can choose how much money to take out from a HELOC up to a certain limit during what is known as the “draw period.” And because a HELOC is a line of credit rather than a loan, you can draw from it any time during the draw period, usually 10 years.

You also make monthly payments on HELOCs. Often, you are only required to make interest payments during an initial period. After the draw period, you make monthly principal and interest payments until the line of credit is paid off.

Related: How Does a Home Equity Line of Credit Work?

Requirements for a Home Equity Line of Credit

To qualify for a HELOC you must meet certain financial requirements. These are set by the lender and may differ depending on their requirements for these types of loans. 

Lenders typically look at your home equity, your loan-to-value ratio, your debt-to-income ratio, and your credit score before deciding whether you qualify. These numbers can also affect the interest rate they might offer you on a HELOC.

Let’s break down these requirements in more detail.

Home Equity and Loan-to-Value (LTV) Ratio Requirements for HELOCs

To qualify for a HELOC, you must first have enough equity in your home. Your home equity is the current market value of your house minus what you owe on your mortgage and any other loans and liens against it. Typically, you aren’t allowed to borrow the full amount of your home equity with a HELOC.

Instead, a limit is usually set for the amount of money you can borrow based on a loan-to-value (LTV) ratio. Figure your LTV ratio by dividing the amount of your existing mortgage and other loans against your home by its current value. The result will always be expressed as a percentage.

At UCCU, we offer HELOCs up to a maximum loan-to-value ratio of 90%. However, be aware the rate may be higher in this case. Lenders typically use this maximum to decide how much you’re able to realistically borrow. You’re the most qualified for a HELOC when you have a large amount of home equity and a low loan-to-value ratio.

Debt-to-Income Ratio Requirements for HELOCs

Another number many lenders consider before they decide if you qualify for a HELOC is your debt-to-income (DTI) ratio. Your DTI ratio is the total of all your monthly debt payments divided by your gross monthly income.

When deciding whether you qualify for a HELOC, your current total monthly debt payments will be used plus an estimate of what your payments for the new HELOC might be. Each lender has a specific maximum DTI to qualify for a HELOC and your ratio must stay under this maximum.

The maximum DTI is different for different lenders. Some lenders follow the guidelines of the Consumer Financial Protection Bureau, which recommends that people keep their debt-to-income ratio under 43%. The lower your debt-to-income ratio, the easier it can be to qualify for a HELOC.

Credit Score Requirements for HELOCs

Your credit score is a three-digit number that estimates how likely you are to pay back the money you borrow. A higher credit score is better than a lower score. Lenders look at your credit score to help them decide whether you qualify for a HELOC and what interest rate they might offer you.

Like other HELOC requirements, the credit score you need can be different from lender to lender. A general rule is that a credit score of 620 or higher is needed to qualify for the best rates on loans.  

Requirements for a Home Equity Line of Credit With UCCU

When it’s your HELOC, it’s up to you!

Whether you decide to make repairs, consolidate higher-interest debt, or finally take that dream vacation, get access to the funds you need with UCCU. 

Click below for our different HELOC options available. Each offers certain terms and advantages with no origination fees or closing costs*. Get started with UCCU today!

*APR = Annual Percentage Rate. Financing is subject to UCCU membership and underwriting criteria. Not every applicant will qualify. Property insurance is required. Variable rates based on the Prime Rate as published in the Wall Street Journal on the 15th day of the month prior. No closing costs and no fee options available: Conditions apply. Appraisal fee will apply if loan amount is greater than $400,000 or if required by the underwriter. If the loan is paid off within 24 months of funding date, reimbursement of all third party fees required. These may include but not limited to title, automated valuation, and insurance fees. Rates, terms, and programs are subject to change and without notice. Equal housing lender. NMLS # 407653. Federally insured by NCUA.