A home equity line of credit (HELOC) allows you to tap into your home's equity for cash to consolidate debts, pay for a major expense or just about any other reason. As a revolving line of credit, a HELOC works like a credit card that allows you to draw what you need, when you need it, up to your credit limit. Unlike a credit card, however, a HELOC requires you to secure the credit line by using your home as collateral.
You can get a HELOC by applying with a lender and meeting their eligibility criteria. Improve your odds of approval by understanding common lender requirements and strengthening your financial profile.
HELOC Requirements
Before applying for a home equity line of credit, you'll want to see how you stack up against typical lender requirements. Since the application process includes a hard inquiry that can ding your credit score by a few points, it's a good idea to make sure you're a good HELOC candidate before moving forward. Here's a breakdown of the most common requirements for HELOCs.
- 15% to 20% home equity: To open a credit line, you'll need sufficient home equity. Your lender will order an appraisal to determine your home's value, then subtract your loan balance to calculate your equity. Generally, you must have 15% to 20% equity. In other words, your loan balance shouldn't be more than 80% to 85% of your home's appraised value.
- Good credit: You may qualify for a HELOC with a minimum credit score of 680, but you'll typically need a score of 700 or higher to secure the most favorable rates and terms.
- Debt-to-income ratio (DTI) below 43%: Your DTI measures how much of your gross monthly income goes toward your monthly debt payments. It's an important consideration for lenders because it helps them determine if your budget has enough room to handle a new monthly HELOC payment. Lenders generally prefer your DTI to be below 43%.
- Steady employment and income: Lenders want to see that you have reliable income from a traditional job, self-employment or another source. No matter how you earn money, be prepared to show recent pay stubs, W-2s, income tax returns or other forms of income verification to support the employment and income information you enter on your HELOC application.
- Strong payment history: Besides checking your credit score, lenders also pull your credit report to review your payment history. They want to assess how well you manage your debts, so they're looking for a strong record of on-time payments on your credit cards, mortgages, loans and other debts.
- Proof of homeowners insurance: Lenders want to make sure their investment is protected, so you'll typically need homeowners insurance coverage to qualify for a HELOC. If your home suffers catastrophic loss or damage, the insurance protects them from significant financial loss.
Learn more >> What You Need to Know About HELOCs
How to Apply for a HELOC
If you've already assessed your home equity, credit score, DTI and other eligibility factors, you're well prepared to proceed with the application. The application process for a HELOC is much like other loans and includes the following steps:
1. Compare Multiple Loan Offers
Start the process by reviewing HELOC interest rates from several banks, credit unions and online mortgage lenders. To see what HELOC amounts, rates and terms you might qualify for, you can prequalify with lenders without impacting your credit. Carefully review the offers you receive to determine the best overall value.
2. Collect Your Documents
The application process will require you to back up any information you provide about your credit, employment, income and more. You'll save time in the long run by gathering these important documents ahead of time, including W-2s, pay stubs, bank and investment account statements, mortgage documents and proof of homeowners insurance.
3. Fill Out the Application
With your supporting documents in hand, complete and submit the application for the line of credit. Many banks, credit unions and mortgage brokers allow you to apply online, but you may apply in person at financial institutions if you prefer working with a professional to guide you through the process.
4. Wait for Approval
The lender should let you know if your HELOC application has been approved, which could take a few days or up to a few weeks. During the underwriting process, the lender reviews your financials and determines your creditworthiness.
Also, your lender will typically require a home appraisal for the HELOC to accurately determine your home's value and, ultimately, your home equity amount. Your lender may order the appraisal, but you'll likely be responsible for the fee, typically ranging from $300 to $450.
You can help move the process along by quickly responding to lender requests and supplying information and documents as necessary. If you need the line of credit quickly, it's a good idea to ask potential lenders about their approval timelines ahead of time.
5. Close on Your HELOC
Once underwriting is complete, your lender will inform you of the final approval, credit line limit and interest rate. Read over the loan documents carefully to make sure you understand and agree with the terms. Don't be afraid to ask questions if you need explanation or clarification on any details.
If you're satisfied with the HELOC agreement, you may sign the loan documents and close the loan. Remember, you'll have a three-day rescission period after closing to cancel the loan without penalty.
Learn more >> Best Ways to Use a HELOC
Alternatives to a Home Equity Line of Credit
A HELOC is an excellent way to access a line of credit you can draw from as needed, but it's not your only option. If you're unsure whether a HELOC is the right fit for you, explore these credit and loan alternatives that might suit you better.
Home Equity Loan
Like a HELOC, a home equity loan is a second mortgage that allows you to use your home equity for cash. You may prefer a home equity loan over a HELOC if you want access to a large, lump-sum payment. You might qualify for a home equity loan up to 75% to 85% of your home's equity, which you'll repay with fixed-interest payments over a term ranging from five to 30 years. Bear in mind, a home equity loan is secured by your home, so your lender could foreclose if you fall behind on payments.
Personal Loan
If you'd rather not put your home at risk, a personal loan may make sense. Personal loans are available from a few hundred dollars to $100,000 with fixed annual percentage rates (APRs) that tend to be lower than credit card rates. Loan terms range from one to seven years. Keep in mind, some lenders—but not all—charge an origination fee from 1% to 10% of the loan amount.
0% Intro APR Credit Card
Depending on your needs, you may want to consider a 0% intro APR credit card, which is available for purchases or balance transfers. This type of credit card may be a good option to pay for a large expense or consolidate high credit card debt. The introductory period could give you up to 21 months to pay off your balance interest-free. Any remaining balance after the promotional period ends is subject to your cards standard rate.
Cash-Out Refinance
A cash-out refinance lets you borrow against the equity in your home by refinancing for a larger mortgage amount and receiving the difference in cash. Many homeowners take advantage of a cash-out refinance when interest rates are lower than their existing mortgage. It may be a great way to access up to 80% of your property value and potentially lower your interest charges.
On the other hand, a cash-out refinance may not make sense if the interest rate on your new loan is considerably higher or if you don't want to use your home as collateral.
Learn more >> Home Equity Loan vs. HELOC vs. Cash-Out Refinance
Frequently Asked Questions
Minimum credit score requirements vary from one lender to another, but you'll typically need a credit score of at least 680, and some lenders have higher requirements. Generally, the higher your credit score, the greater your odds of receiving favorable rates and terms from lenders. While credit score is a critical factor lenders consider, it's not the only one. You'll also need sufficient home equity, steady income, a low debt-to-income ratio and more.
When you apply for a HELOC, your lender pulls your credit to help determine your creditworthiness. This hard inquiry remains on your credit report for two years, but its potential impact—typically a score decrease of fewer than five points—usually only lasts for one year.
How you repay and use your HELOC could also influence your score. For example, paying your HELOC bill on time each month could strengthen your payment history, which makes up 35% of your FICO® Score☉ , the credit score used by 90% of top lenders. Missing one or more payments could have a significant negative effect. And if you use HELOC funds to pay off high-interest credit cards, you could lower your credit utilization rate and possibly improve your score. However, missing one or more payments by 30 days or more could have a significant negative effect.
Borrowers repay their HELOC over two phases: the draw period and the repayment period. During the draw period, which usually lasts five to 10 years, you can withdraw funds whenever you like as long as you stay within your credit limit. Your payments are lower during this period because they typically only go toward the interest on the balance.
Once the draw period expires, you can no longer make withdrawals and you begin the repayment period. You'll make principal and interest payments during this period, usually for 20 years.
Shape Up Your Credit Before Applying
Depending on the lender, you might qualify for a home equity line of credit with a lower credit score. However, a high credit score could help you get more favorable rates and terms that may save you significantly over time in interest charges.
Before you apply, check your credit report and credit score for free to get a clearer picture of your credit. By reviewing your credit report, you'll see what lenders will see and if there are any issues that need addressing. Taking steps to improve your credit score could take time, but it could be worth it to save money on your new HELOC.