If you have equity in your home, you may want to use that equity to get cash to help with expenses such as paying off debt or medical expenses bills or home improvements. One way to use your equity from your home is through a HELOC (Home Equity Line of Credit). If you’re considering a HELOC, you should understand what is needed to help you qualify. Here are three common HELOC requirements to consider before starting the application process.
1. HELOC credit score requirements
Talk with potential lenders about their minimum good credit score requirements for HELOC. Having good credit is not only a requirement for a HELOC, but for all loans. Lenders will look at your credit score to determine your ability to pay off the loan. A good credit score means you have a better chance of getting approved and could get you a more favorable term and interest rate. It’s a good idea to check your credit score before you apply for a HELOC to look for any issues or discrepancies so you can get them corrected before you apply the process.
2. HELOC and your debt to income ratio
A low debt-to-income ratio can improve your chances at a HELOC. Debt-to-income ratio measures your monthly debt compared to your income. To calculate your DTI, you divide your monthly debt by your gross income. For example, if you have a monthly debt of $2,000 (loans, credit card etc.) and your income is $5,000, your DTI would be 40%. When your debt-to-income ratio is low that shows that you are better able to manage your debt and afford to pay your bills. If your DTI is over 45%, you may have trouble qualifying for a loan. It’s important to tally up your bills to see how much you can afford based on your income. To increase your opportunity to qualify for a HELOC avoid high debt to income ratio. If you have bills that you can pay off before you apply for a HELOC, doing so will improve your DTI giving you a better chance of getting approved and at a lower rate.
3. HELOC home equity requirements
How much Home equity do you need for a HELOC? Another requirement of a HELOC is that you need to have enough equity in your home. This is determined by the amount your home is worth divided by the amount you owe on the house. If you have a $200,000 home and you owe $100,000, then you have a loan-to-value ratio of 50%. The lower the LTV ratio means the more equity you have in your home which means the better your chance of meeting the HELOC equity requirements.
4. HELOC loan requirements
Consider these HELOC loan requirements and look at your individual financial situation to help you determine if this is the best option for your needs. Learn more about how you can use your home’s equity and the differences between a HELOC, home equity loan and cash out refinance. Freedom Mortgage may be able to help you with a cash out refinance, which is an alternative to a HELOC.
Contact us today at 877-220-5533 and let our experienced loan advisors help you find the best solution to get cash out of your home’s equity.