Homeownership brings you many benefits, personally as well as financially. You have a home to call yours that you can decorate to your heart’s content and live comfortably. You also get the advantage of property tax deduction and other reduction of other property-related expenses. One such benefit also includes the ability to build home equity and after a certain period, borrow against it.
You can build home equity by either paying down your mortgage or investing in home improvement projects. When you have enough of it, you can tap into it and go for a Home Equity Line of Credit aka HELOC.
You have to apply for and there are certain HELOC requirements that you have to be qualified against. Some common ones include having a good credit score and a good amount of home equity. If you’re wondering how to ensure that you’ll get approved for HELOC,.
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Understanding the Workings of HELOC
Similar to a credit card, a HELOC is a kind of rotating line of credit that you can effortlessly draw from and pay back repeatedly. Varying from lender to lender and different guidelines, sometimes an owner can access up to 80% of their home equity with a repayment contract of up to 30 years.
However, in contrast to a credit card, the contract of a HELOC is divided into a definite time period for withdrawal and repayment. The withdrawal period usually goes up to 5 to 15 years, in this period you can draw money from your HELOC up to the limit of credit and are required to make payments with minimum interest.
However, when the withdrawal time is over, you can no longer pull from the HELOC and are required to pay off all that you had borrowed and are yet to pay. This called the repayment period. This period can last from 10 to 20 years.
HELOC Requirements in 2022
As mentioned before, there are some customary grounds that you can qualify against that will allow you to get approved for a HELOC by many lenders. These include:
- Good Amount of Home Equity Qualifies You
First of all, what is equity? Equity is the difference left after you divide the mortgage from the current value of your home. If you want to be eligible for a HELOC, you are required to have 15 to 20% equity.
However, no matter how much equity you have, there are still limits to how much you can get with a HELOC. You will offer a limit will base on the LTV/ Loan-to-Value ratio you have.
A few lenders also consider your property debt against the value, this called a CLTV/ Combined Loan-to-Value ratio. They don’t want the CLTV to go above 85%. However, some lenders consider 90% to be eligible for a HELOC.
So, in order to figure out your CLTV, you can just add up all of your secured loans, like home equity loans or first mortgage, and then divide it all by your home’s value.
- Good Credit Score Soars Your Reputation
A low credit score means you’re a risky candidate to invest in. In order to determine if you’re worth the investment or not, lenders review your credit score. So, if you want to get approval for a HELOC, your score needs to fall somewhere in the 600s or you’re an immediate no.
If you have a score of 700 or higher, then even better. When you have a good credit score, it can also get you better interest rates, meaning the higher the credit score, the cheaper the rates!
- A Strong Payment History Makes You a Perfect Candidate
Yes, your credit score is necessary, but sometimes lenders pay more attention to your payment history than other credit components. This enables them to determine if you’re a risky borrower or not.
As HELOC is like a second mortgage, a lender needs to know that you are reliable enough to pay back whatever you withdraw.
- Ample Income and Strong Documentation Gives You a Good Chance
Just like above, lenders need to ensure that you’ll be able to afford the HELOC Requirements. Therefore, you need to give proof of enough income that allows you to not only repay the HELOC but also make you eligible to apply you for a HELOC as well.
This proof of income documentation should include:
- Most recent pay stubs and W-2 employee wages.
- If you self-employed then the latest federal tax returns.
- Your social security account verification letter.
- Other income proofs may contain 1099 forms, retirement award letters, or benefit statements.
- Low or No Debt Makes Your Character Trustworthy
Your DTI/ Debt-to-Income ratio is the amount that you give to the monthly debts that you owe, meaning your credit cards or mortgage. When lenders consider your DTI, they determine if you’ll be able to manage the HELOC repayment as well.
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Benefits of HELOC
Some benefits of HELOC are:
- Few Restrictions
Unlike credit cards, you not restricted to use the funds. Whatever you want to do with the money you withdraw is up to you. So, whether it’s home renovations or vacation traveling, go for it!
- Qualify for Low Annual Percentage Rate (APR)
Compared to credit cards, HELOC also offers you low initial costs or lower interest rates as well. So, benefit from the less yearly costs with HELOC.
- Get Flexibility
HELOC allows you flexibility in borrowing and repayment periods and the amount you withdraw. You can take out up to 80 to 85% of your home’s value and then effortlessly repay it!
How to Apply for it?
In order to apply for a HELOC, these are the steps you need to follow:
- Compare different lenders
- Fill out the application and collect all your documentation
- Get an appraisal for your home
- Get ready for closing
- Get access to your funds
If you fulfill all the HELOC Requirements in 2022 above, all you have to do is apply for it. After that, it’s just a waiting game. The application process and closing take about two to four weeks and then you’re ready to take access to your funds!