HELOC Eligibility: Everything You Need To Know

A home equity line of credit (HELOC) is a popular financing option for homeowners looking to leverage the equity they’ve built up in their property. 

Basic HELOC Eligibility Criteria

1. Sufficient Home Equity

The most critical requirement for a HELOC is having enough equity in your home. Home equity is the difference between the current market value of your home and the amount you still owe on your mortgage. Most lenders require that you have at least 15% to 20% equity in your home.

If your home is valued at $400,000 and you owe $280,000, you have $120,000 in equity. Most lenders allow a Combined Loan-to-Value (CLTV) ratio of up to 85% of your home’s value, which includes your existing mortgage and any additional loans, such as a HELOC. This means you could borrow up to $60,000 in addition to your current mortgage. 

However, if your renovation plans exceed what your current equity can support, RenoFi loans are the alternative that allows you to borrow based on the future value of your home after renovations,  unlocking significantly more funding than a traditional HELOC.

2. Good Credit Score

A good credit score is essential for HELOC eligibility. Most lenders require a minimum credit score of 620, though a score of 700 or higher will improve your chances of approval and could get you a better interest rate. Your credit score demonstrates your financial responsibility and ability to repay borrowed funds, which makes lenders more willing to extend your credit.

The same applies to RenoFi loans, where good credit is important. The advantages of RenoFi loans, such as increased borrowing capacity, often make them a superior option for homeowners planning significant renovations. 

3. Debt-to-Income (DTI) Ratio

Lenders assess your debt-to-income (DTI) ratio to determine the portion of your monthly earnings used to cover debt payments. The general rule is that your DTI should not exceed 43%, although some lenders may allow up to 50%. To determine the debt-to-income ratio, divide your total monthly debt payments by your total monthly income.

For example, if you have $2,000 in monthly debt and your monthly income is $6,000, your DTI ratio is 33% ($2,000 ÷ $6,000 = 0.33 or 33%).

4. Stable Income and Employment History

A consistent income and stable employment are necessary for HELOC eligibility. Lenders want assurance that you’ll be able to make payments, and a reliable income provides that confidence. 

Most lenders prefer borrowers who have been employed with the same company for at least two years or have a consistent source of income, such as self-employment with verifiable income records.

5. Low Loan-to-Value (LTV) Ratio

The loan-to-value (LTV) ratio compares your loan amount to your home’s value. For HELOCs, lenders typically look for an LTV ratio below 80%. This means you should not owe more than 80% of your home’s value on your mortgage and any other home loans, including the HELOC.

Traditional HELOC vs RenoFi Loan

A HELOC lets homeowners borrow against their home’s equity. It functions like a credit card with a draw period of 5 to 10 years, followed by repayment of both principal and interest (typically over 10 to 20 years).

However, RenoFi loans are specialized financial products designed for home renovations. Unlike traditional home equity loans, they take into account the home’s projected value after the renovations are complete. This allows for significantly increased borrowing power, enabling homeowners to tackle their entire renovation wishlist. 

Consider a scenario where your home is valued at around $500,000, and your outstanding mortgage balance is $400,000. You’re planning renovations that you believe will increase your home’s value to approximately $640,000. With a loan-to-value (LTV) ratio of 80%, you are not going to be able to borrow any additional funds for those renovations using a traditional home equity loan. 

In contrast, a RenoFi loan lets you borrow against the projected value of the home after the renovations are completed. This allows for an LTV of up to 150% or 90% of the home’s new value. 

So, while a standard home equity loan, in this case, would offer the homeowner no borrowing capacity, a RenoFi loan would enable you to access up to $176,000 based on your home’s anticipated value post renovations. 

Conclusion

A HELOC can be an excellent financing option for homeowners, but qualifying for one requires meeting specific criteria. Lenders consider sufficient equity, a good credit score, and a low debt-to-income ratio. 

If you’re not eligible for a HELOC or need to borrow more than your current equity allows, consider alternatives like RenoFi loans. These loans provide flexibility by leveraging your home’s after-renovation value.

RenoFi loans are the smartest way to finance home renovations based on your home’s after-renovation value. This lets you borrow up to 11x more, keep low monthly payments, and maintain your current mortgage rate.

Learn more about your borrowing options and start with a RenoFi loan today!