How Hard Is It To Get A HELOC? (2024)

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How difficult is it to get approved for a HELOC?

Getting a home equity line of credit (HELOC) is typically a straightforward and easy process, as long as you meet the necessary HELOC eligibility requirements.

What are HELOCs and how do they work?

A HELOC is a type of secured loan that lets you borrow money as a line of credit. A line of credit limit is determined by the lender based on several factors, including the equity in your home, your property’s fair market value, and your credit score. Generally, the more equity you have, the higher the amount of credit you’ll be approved for.

A secured loan requires you, the borrower, to pledge an asset as collateral to “secure” the loan. With a HELOC, your home is the collateral securing the loan. This means if you fail to repay the loan the lender can foreclose and take your home.

How hard is it to get a HELOC? Getting a HELOC is a straightforward process, and many homeowners benefit greatly from their HELOC. HELOC funds can be used for anything, including making home renovations, paying off high-interest debt, paying for college tuition and even as a down payment on a second home or investment property.

HELOC eligibility requirements

Each lender will have a unique set of HELOC qualification requirements for borrowers, some of which are listed below:

Equity. Most lenders typically want to see 15-20% equity in the home that will secure the loan. Equity is the amount of the home you own. A homeowner who doesn’t have a mortgage loan has 100% equity in their home. To calculate equity, subtract the mortgage amount from the appraised or market value amount. For example: Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity.

Credit score. Most lenders require a HELOC credit score requirement in the mid 600s. Some lenders may require a higher score and some lenders may accept a lower score. The higher your credit score, the better (lower) the interest rate you’ll be offered on a HELOC and other loans.

Debt-to-income (DTI) ratio. Lenders typically look for a debt-to-income ratio under 43%. Your DTI ratio can be calculated by adding all your monthly debt payments and dividing that number by your gross monthly income. For example: If you pay $1,800 a month for your mortgage and pay $350 a month for an auto loan, then $1,800 + $350 = $2,150 monthly debt. If your gross monthly income is $6,000, then your debt-to-income ratio is 35%. ($2,150 ÷ $6,000 = .35).

Proof of income. In addition to looking at your home equity, credit score and credit history, lenders will ask to see proof of employment and proof of income. Income will be used to calculate your debt-to-income ratio (DTI).

How to increase your odds of approval

Here are some tips for increasing your odds of getting approved for a HELOC:

Take steps to build/improve your credit score. If you find that bad credit is preventing you from getting approved for loans or jobs, there are steps you can take to build credit and raise your credit score.

Don't apply for new lines of credit. Credit scores are calculated based on a numeric scoring system. According to FICO Scores, the most common scoring company, new credit applications count for 10% of an individual’s credit score. Applying for new credit typically results in a small temporary decrease in score.

Pay down/consolidate debt. Lowering your debt-to-income ratio is essential to getting approved for a HELOC. Any debt you can pay down, pay off or consolidate to a lower interest rate will put you in a better financial position and strengthen your HELOC loan application.

Consider adding a cosigner. Adding another individual to the HELOC as a cosigner for the loan means their income and debt will be considered during the loan application process, in addition to yours. If you have a low credit score, for example, and the cosigner has an excellent credit score, the lender may use the higher credit score to help qualify you for the loan.

Raise the value of your home. Making some home improvements could increase the market value of your home, thereby increasing the loan-to-value ratio (LTV), another factor that lenders look at during the HELOC loan application process.

Increase your income. Taking a second job or finding a higher paying job are two ways to increase your income, which will help reduce your debt-to-income ratio.

Considering refinancing. In a low interest rate environment refinancing your current mortgage to a lower interest rate would reduce your debt load.

How to get a HELOC step-by-step

Check your credit score. The credit score for a HELOC is typically in the mid-600s. Federal law entitles everyone to a free copy of their credit report once every 12 months from each Credit Reporting Agency (also called a Credit Bureau).

Calculate your home equity. Home equity is the dollar portion of the home that you own based on how much you owe on your mortgage, as well as any other secured loans that use the home as collateral. For example, if you do not have a mortgage on your home, then you have 100% equity. People who have a mortgage own only a percentage of the home (and the lender who holds the mortgage owns a percentage of the home). To calculate equity, take the amount your property is currently worth, or the appraised value, and subtract the amount of any existing mortgage on your property.

For example: Appraised value is $600,000 – Amount owed on mortgage is $250,000 = $350,000 Equity.

Gather the necessary documents. Below is a list of the income documentation and other documents lenders may ask for to verify your employment, income, and overall financial situation. How long it takes to get a HELOC will depend on how quickly you can supply the lender with the required information, plus the lender’s underwriting and HELOC processing time.

Pay stubs. In addition to showing your tax returns and reported earnings, some lenders may ask to see the actual paystubs from your paychecks.

IRS Form W-2. Each year, employers must complete and provide their employees a W-2 Wage and Tax Statement showing the wages paid and taxes withheld for the year for each employee. Lenders will ask to see your W-2s to verify employment and income.

IRS Schedule K-1 (Form 1065). According to the Internal Revenue Service (IRS),
People who are part of a business partnership may receive a copy for this form which is provided by the partnership. Partnerships use Schedule K-1 to report your share of the partnership's income, deductions, credits, etc. Lenders will ask to be provided will all types of earnings to qualify you for a HELOC.

Tax returns. The lender may ask to see one or more years tax returns.

Bank and investment statements. You may also be asked to provide statements from your savings and checking accounts, and investment account statements.

Mortgage statement. Be prepared to show your most recent mortgage payment statement. Lenders want to see how much you owe on your current mortgage.

Proof of insurance. Proof of homeowners insurance is required if you still owe money on your mortgage.

Home appraisal. The lender will order an appraisal to determine the current fair market value of your home. The appraisal will provide the value in the loan-to-value ratio equation.

Shop different lenders. Start by talking to your current mortgage lender. This could save you time and money because your current lender will have much of your personal information still on file, and they may be able to provide you with a better rate due to your relationship with them. It’s always smart to shop around and speak to a couple of different lenders about HELOC interest rates and terms. Credit unions, banks, mortgage companies and online lenders all provide HELOC options.

Apply in-person or online. Today’s menders provide flexible options for HELOC applications. You may be able to apply entirely online by uploading the required information. Other lenders may ask you to start your application online then visit a branch to complete the application. Whichever method you choose, to ask questions about the loan you are applying for and get the information you need to fully understand your interest rate, terms, and repayment obligation.

Is it difficult to get approved for a HELOC? There’s no one-size-fits-all answer, but generally, it’s not hard to get a HELOC. If you’ve paid your current mortgage on time and you have sufficient equity in your home, you may be a good candidate for a HELOC.

Why Savvy Consumers Choose CU SoCal

For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.

Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.

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