A home equity line of credit (HELOC) is a credit line established against the equity in your home. It allows you to borrow as needed. To qualify for a HELOC, you will have to show that you have available equity in your home. Lenders commonly restrict borrowing amounts to 85 percent of the home’s appraised value minus any mortgage(s) on the home.
“At Hanscom Federal Credit Union, for our home equity lines of credit, we will lend up to 100 percent of the home’s value minus any first mortgage secured by the home,” said Tom Becker, Hanscom FCU Senior Vice President of Lending. “In Florida, Arizona and Nevada, we limit that to 65 percent, and the limit is 50 percent in California.”
You will also need to show that you meet the debt-to-income ratio required by your lender. This percentage indicates what part of your monthly income is taken up by your monthly debt payments. Start by adding up your monthly payments, including your mortgage, auto loan or lease, credit cards, other personal loan payments, and your projected home equity payment. Take the total of those payments and divide it by your current monthly income before taxes. The result is your debt-to-income ratio. Most lenders require this number to be no higher than 36 percent.
Finally, review your credit report to understand your credit score and correct any misinformation. Lenders will use your score to determine your creditworthiness.
“We look at many different factors when reviewing a credit report,” said Becker. “This includes payment history, particularly on current or prior mortgage loans; late payments on all types of loans; the type of debt recorded in the report (unsecured credit card, student loan debt, secured debt such as an auto loan or a mortgage, for example); the number of accounts with balances; the number of recent (within the past six months) credit report inquiries; the amount of debt compared to the credit limit (referred to as capacity); and, of course, collection accounts and the type of collection accounts (medical bills, cable or cell phone bills, and credit cards, for example.)”
Hanscom Federal Credit Union members can access their credit score and reports at no charge. For information or to set up an appointment, visit hfcu.org/score.
To understand the entire HELOC application process, including the questions you should be asking when shopping for a HELOC, take advantage of the free download Equity Edge: Answers to Commonly Asked Questions. This publication is a collection of answers to the most frequently asked questions we get about home equity.