HELOC Requirements: Everything You Need to Know

HELOC requirements typically include having sufficient equity in a borrower’s home and a good credit score, among other qualifications.

A thorough understanding of the HELOC requirements increases your chances of loan approval. Let’s dig deep into the nuts and bolts of a HELOC and the eligibility requirements you must meet to secure this financing option.

What Are the HELOC Requirements in 2024?

HELOC, a type of home loan, requires you to put up your property as collateral to secure the deal. If you cannot repay the loan, the lender can legally take ownership of your residence. 

To prevent the risk of foreclosure, it is significant to understand HELOC’s eligibility requirements and determine whether it is the right choice for you. Prominent HELOC requirements, as of 2024, include:

1. Have Adequate Home Equity

The first requirement for obtaining a home equity line of credit is having ample equity in your property. Equity refers to the difference between the market value of the property and your outstanding mortgage balance. It can be increased by making additional mortgage payments and improving the property’s overall value through renovations and upgrades. Lenders typically use the loan-to-value ratio to determine this amount.

Most lenders require the borrower to have a minimum equity of 15 to 20% to qualify for a HELOC. Additionally, lenders may consider the combined loan-to-value ratio (CLTV), which is determined by summing the balances of all your debt and dividing it by the property’s market value. The CLTV should ideally be less than 85%, although some lenders may accept 90% as well.

The LTV is also used to determine the borrowing limit for HELOCs. This is generally between 80% and 90% but can be maximized by focusing more on the project’s after-renovation value than its current value.

RenoFi loans use this strategy to offer you a much higher borrowing power. To explain this, let’s consider a scenario where the current value of your property is $500,000 with an outstanding mortgage balance of $400,000. You expect the after-renovation value of the property to be about $640,000.

With a standard home equity loan, the 80% LTV does not allow you to borrow anything to finance the home renovation project. RenoFi’s focus on the property’s after-renovation value will enable you to borrow up to $176,000!

2. Have a Good Credit Score

Your credit score determines how financially responsible you are and is used by lenders to decide whether you are worth the investment. While the score requirement varies from lender to lender, a mid-to-high 600s or higher credit score is required to get approval for HELOC.

The higher the score, the greater the likelihood of qualifying for a HELOC. For best results, aim for a credit score of at least 680. To increase your creditworthiness, make on-time bill payments, reduce your credit card balance, and limit the creation of new accounts.

3. Show Sufficient Income and Documentation

While a HELOC doesn’t have a specific income requirement, it still needs income proof to verify that the borrower can afford the loan repayment. You should be prepared to submit verified paperwork like pay stubs if you are employed, federal tax returns if you are self-employed, and other benefits such as retirement award letters and 1099 forms. Last, you should also prove that you have a consistent source of income to cover your financial duties.

4. Have a Low DTI Ratio

A debt-to-income (DTI) ratio estimates your gross income relative to the monthly debt payments. DTI ratio indicates whether you can handle another debt without the risk of defaulting. 

Every lender requires a distinct DTI ratio to qualify for HELOC, but generally, a value between 43% and 50% or lower is preferred. Some practical tips to lower your DTI ratio include debt consolidation, increasing gross income, avoiding new debts, and reviewing your finances regularly.

What Are HELOCs and How Do They Work?

HELOC, short for home equity line of credit, is a type of second mortgage that allows you to borrow against your home’s built-up equity. These loans are an excellent way to finance home renovations, medical emergencies, debt consolidation, and educational expenses. 

Rather than providing the amount as a lump sum, a HELOC functions similarly to a credit card and allows you to borrow up to a specific amount as needed. The loan term is split into draw and repayment periods. 

During the draw phase, typically lasting for about 10 years, the line of credit is open for the borrowers. The repayment period (10 to 20 years) requires the borrower to repay the borrowed amount monthly. 

How to Apply for HELOC

Once you meet its eligibility requirements, you should start applying for HELOC. Here’s a step-by-step guide to do this:

1. Research Potential Lenders: Shop around for different lenders and compare them based on interest rates, repayment terms, additional fees, and the lender’s specific requirements to find the HELOC best suited to your needs.
2. Gather Documentation: After picking a lender, you need to fill out the loan application and prepare the necessary documents. The application form can be filled out online or by visiting the lender’s office with the required paperwork(bank statements, pay stubs, etc.).
3. Get a Home Appraisal: Once the lender has evaluated your income and creditworthiness, they may ask for a home appraisal. This calculates your property’s existing value and requires paying the appraisal fee.
4. Close the Loan: For the last step, the lender will confirm that you have been approved for the loan and share the interest rate, credit limit, and other details. Confirm the loan by signing the documents to access the funds as and when you like.

Conclusion

HELOCs are efficient financing tools for covering the expenses of a myriad of projects, including renovations and medical bills. Meeting HELOC requirements is essential to increasing your chances of qualifying for the loan and preventing the risk of foreclosure.

However, RenoFi loans are designed to offer a much more attractive alternative to traditional home equity loans. They are more concerned with the project’s after-renovation value than its existing value. As a result, you can borrow about 11 times more without giving up your first mortgage’s low rate, as in traditional loans.

Once you have read through HELOC’s eligibility requirements, you can explore the financing options available to help you start your home renovation journey on the right foot.