Qualifying to take out a home equity line of credit is roughly similar to qualifying for a mortgage. The lender will need to see -- and you'll need to prove -- that you can repay what you borrowed. It will check your credit, as well, to get an indication of your history with debt. HELOC lenders also must ensure that you have enough collateral in your home to support the loan by getting an appraisal.
Estimate the value of your home by getting a valuation from a real estate agent or using the comparable sales data and valuation tools available at real estate websites such as Zillow or Trulia. Multiply that value by a HELOC lender's combined loan-to-value ratio -- frequently around 85 percent, although a combined loan to value as high as 95 percent may be possible -- and subtract your mortgage balance to estimate how much you'll be able to borrow.
Collect supporting documentation. Depending on your lender, you may need to provide tax returns, paystubs, W-2s and bank statements. You will probably also need to share information on your existing home with your lender so that it can verify both what you spend and what you owe. The HELOC lender could request a copy of your deed, homeowners insurance policy and bills, property tax bills and mortgage statements. Bear in mind, though, that lenders are frequently less stringent with HELOCs than with mortgages, so you may also get away with sharing less material.
Request a credit report from a lender or from your credit bureaus to see if any incorrect entries are hurting your scores. If errors are on your credit report, use the credit bureau's dispute process, frequently available online, to have them corrected before you apply for a HELOC. While your lender will pull a credit report during the qualification process as well, if you can get ahead of any issues, it'll increase the likelihood that you successfully qualify.
Spruce up your house to maximize your appraised value. Your HELOC's limit will be set based on three factors: your existing mortgage balance, the appraised value of your house, and your lender's combined loan-to-value ratio. The more your house is worth, the more you'll be able to borrow, so tidying up your home and yard and fixing any obvious problems before the appraiser comes can lead to a bigger loan -- and a more pleasant home for you.
Submit any required documentation to your lender and complete its application form. Your lender will let you know whether you have qualified. If so, it will send out an appraiser to determine your home's value and, pending the appraisal, it will schedule the closing so that you can open your HELOC.
References
- The New York Times: Easing Home Equity Standards
- The Wall Street Journal: Home Equity Loans and HELOCs – Getting a Good Deal
- The Wall Street Journal: Ten Tips for High Value Home Appraisals
- U.S. Bank. "Home equity FAQs." Accessed June 12, 2020.
- U.S. Bank. "Home Equity Line of Credit (HELOC)." Accessed June 12, 2020.
- Bank of America. "Home Equity Assumptions." Accessed June 12, 2020.
- Connexus Credit Union. "Home Equity Loans & Lines of Credit." Accessed June 12, 2020.
- Connexus Credit Union. "Connexus Membership." Accessed June 12, 2020.
- Bank of the West. "Important Terms: Equity Choice Line of Credit." Accessed June 12, 2020.
- Bank of the West. "Home Equity." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit Rates." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit." Accessed June 12, 2020.
- IRS. "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2." Accessed June 12, 2020.
Writer Bio
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.