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A home equity line of credit (HELOC) is a revolving credit line, similar to a credit card. It leverages your home equity as collateral. Home equity is the difference between what you owe on the mortgage and your home value.
You might consider applying for a HELOC if you need flexible access to cash for expenses such as debt consolidation, medical bills, or home improvements. You might also consider getting a HELOC for “just in case” situations.
If you’re unsure how to apply for a HELOC, here’s a closer look at the process.
In this guide:
- What should I do before I apply for a HELOC?
- Apply for a HELOC in 5 steps
- How long does it take?
- What documents do I need?
- Do I need an appraisal?
- Can I apply for a HELOC online?
- Should I get preapproved or prequalified before I apply?
- Will applying affect my credit?
- Will I pay fees to apply?
- Am I obligated to take the HELOC once I apply and get approved?
What should I do before I apply for a HELOC?
Your pre-application checklist to ensure you’re prepared includes the following:
- Determine how much you’d like to borrow.
- Estimate your home equity and loan-to-value ratio (LTV).
- Check your credit history.
- Review your debt-to-income ratio.
The amount you can borrow with a HELOC depends on how much equity you have in the home. You can determine your equity using this formula:
|Home’s current value – outstanding mortgage balance = home equity|
For example, if your home is worth $300,000, and you owe $250,000 on the mortgage, you have $50,000 in equity.
After calculating equity, you’ll need to figure out your LTV. LTV measures the ratio of your mortgage balance to the home’s value.
The LTV formula looks like this:
|(Outstanding mortgage balance / home’s current value) x 100 = LTV|
If you owe $250,000 on your home, and it’s worth $300,000, your LTV is 83%. LTV is important because lenders use it to determine how much you can borrow with a HELOC. Most lenders look for a maximum LTV of 80% or 85%.
Some lenders use combined loan-to-value ratio (CLTV) instead. Your CLTV is the ratio of all loans secured by the property, including the primary mortgage and a HELOC, compared to the home’s value. Lenders that use CLTV may allow up to a 90% ratio for a HELOC.
Lenders also consider your credit scores and debt-to-income (DTI) ratio for a HELOC application. DTI measures how much of your monthly income goes to debt repayment. Many lenders look for a DTI of 43% or less for a HELOC.
Apply for a HELOC in 5 steps
Applying for a HELOC is similar to other mortgage loans. If you’ve already calculated your home equity and LTV, checked your credit, and estimated your DTI, you’ve done much of the heavy lifting.
Here are the next steps to apply for a HELOC:
1. Shop around
Comparison shopping is crucial if you’re hoping to find the best HELOC rates. HELOCs tend to have variable interest rates, though certain lenders may offer a fixed-rate option.
In addition to rates, it’s also important to consider:
- Minimum and maximum HELOC amounts
- LTV or CLVT requirements
- Minimum credit score and income requirements
- Upfront fees, maintenance fees, and closing costs
- Options for accessing your credit line (i.e., debit card, paper checks, electronic transfers, etc.)
It’s also a good idea to consider a HELOC’s draw and repayment periods. Your draw period is the time frame in which you can access your credit line. It typically lasts five to 10 years, and you may be required to make minimum interest payments.
The repayment period, when you’ll typically make principal and interest payments, begins after the draw period ends.
2. Choose a lender
Once you’ve shopped around, the next step is choosing a lender. Your choice may depend on the following:
- What rates you might qualify for.
- How much you can borrow.
- Minimum credit score and income requirements.
You’ll also need to decide whether to apply with your current lender or another bank. Online lenders may be attractive if you can qualify for lower rates. However, it’s worth checking with your bank or credit union to see if you qualify for special relationship rates or discounts.
3. Submit your application
If you’ve chosen a lender, you’re ready to apply.
When you apply for a HELOC, many lenders will want the following information:
- Personal information, including your name, date of birth, and Social Security number
- Property information, including the estimated value and what you owe on the mortgage
- Income and asset information
The lender may ask for permission to pull your credit report at the time you apply. The lender uses your credit history and other information to decide whether to approve you for a HELOC.
Many lenders don’t charge upfront fees to apply for a HELOC. You may, however, see an application fee or credit check fee on the closing documents.
4. Complete underwriting
Underwriting is the process in which the lender verifies the information you shared to approve you for a HELOC. During this period, the lender might ask you for additional information or documentation to complete your application.
The lender may also schedule an appraisal if it’s required. The appraisal helps determine what the home is worth.
5. Close your loan
If there are no obstacles during underwriting, the final step is closing. Closing on a HELOC should be similar to closing on the mortgage when you bought your home.
You’ll meet with the closing attorney and sign any required paperwork. You’ll also need to pay your closing costs, typically 2% to 5% of the loan amount. Once the loan closes, you can access your home equity line.
At that point, you can withdraw from your HELOC as needed for the draw period. You’ll only pay interest on the amount of your credit line you use.
How long does it take to apply for a HELOC?
Submitting your HELOC application may take less than an hour if you’re doing it online. It can take an afternoon if you still need to organize your documents.
How long HELOC approval takes can depend on the specifics of the loan and your lender. It often takes two to six weeks for the lender to review an application and finalize a loan.
You’ll need to wait until after closing to use your credit line, and access may not be immediate. It may take several business days for your lender to deposit the money into your bank account.
What documents do I need to apply for a HELOC?
Documents you should be prepared to provide include:
- Government-issued photo ID
- W-2s for the previous two years
- Pay stubs for the previous 30 days
- Bank statements for the previous 30 to 60 days
- Investment or retirement account statements for the previous 30 to 60 days
- A copy of your homeowners insurance declarations
- A copy of flood insurance declarations if you live in a flood plain
- A copy of your property tax bill
- Your most recent mortgage statement
The lender might require other documents to show proof of income in certain situations. If you’re self-employed, for example, the lender may need a profit-and-loss statement, balance sheet, and copies of your personal and business tax returns for the previous two years.
Likewise, if you’re retired or receive disability benefits, you may need to provide documentation from Social Security or your retirement accounts demonstrating your income.
Do I need an appraisal to apply for a HELOC?
A lender will likely require an appraisal to complete your HELOC application. The appraisal helps the lender determine your home’s value, which can influence how much you can borrow with a HELOC.
If required, your lender will schedule the appraisal, and you’ll pay the fee. Types of appraisals a lender can use for a HELOC include:
- Automated or computerized appraisals
- Drive-by appraisals
- In-person appraisals
Automated appraisals allow the lender to estimate your home’s value using a computer program instead of a professional appraiser visiting your home.
Lenders may use an automated appraisal and back it up with a drive-by appraisal, in which the appraiser inspects the outside of the home. Your lender might not require a complete walk-through appraisal unless it has doubts about your creditworthiness or home value.
Regardless of the method, you’ll be responsible for the appraisal fee. The cost depends on the type of appraisal, but as a rule of thumb, anticipate spending a few hundred dollars.
Can I apply for a HELOC online?
Many lenders allow you to review rates and submit a HELOC application online. You can fill out the application and upload your supporting documents with just a few clicks.
Getting a HELOC online can be convenient since you don’t have to visit a bank in person. You can compare rates without being subjected to any high-pressure sales tactics. If you’ve already done your research, you may be able to navigate the process without any issues.
However, you might prefer to apply in person or over the phone if you have questions about the process or how a HELOC works. Talking to a lender is an opportunity to clarify the finer points and decide whether a HELOC is the right borrowing option for you.
Should I get preapproved or prequalified for a HELOC before I apply?
Getting preapproved or prequalified for a HELOC can help you get an idea of what kind of loan terms you’re likely to qualify for. Both can help you gauge what you can borrow and how much you can afford with a home equity line of credit.
You can use preapprovals or prequalifications to compare different lenders’ rates. Several websites and online tools allow you to compare rates from multiple lenders simultaneously, saving time.
It’s important to remember preapproval and prequalification are just indicators of what you might qualify for. You’ll know your HELOC rates and terms once you’ve applied and your lender finalizes the loan.
Will applying for a HELOC affect my credit?
Getting prequalified for a HELOC generally doesn’t affect your credit because lenders give you an estimate of what you might be able to borrow. With preapproval, lenders take a closer look at your finances to determine what you can borrow. A hard check of your credit may be required.
If you’re getting preapproved or applying for a HELOC and a hard credit check is involved, that will affect your credit score. New credit inquiries account for 10% of your FICO credit score. Since a HELOC is a revolving credit line, that can also affect your score if your balance rises or falls over time.
Should you apply for HELOCs with multiple lenders? You might if you’re trying to find the best rate and loan terms possible. If you’re planning to rate shop, try to get all your quotes within a 30-day window, as FICO will consider them a single inquiry for credit scoring purposes.
Will I pay fees to apply for a HELOC?
HELOC lenders can charge fees similar to other types of mortgage loans. You might pay certain fees upfront and others at closing.
Fees you might pay with a HELOC include the following:
|Fee||Is this common?|
|Appraisal fees||Yes: While the fee varies, most applicants need an appraisal to qualify for a HELOC.|
|Attorney fees||Yes: The closing attorney helps you sign off on the final paperwork and receives a fee for their services.|
|Credit check fees||Yes: Most lenders charge a fee to pull your credit reports.|
|Recording fees||Yes: Once the loan closes, your local tax authority needs to record the new lien.|
|Origination fees||Somewhat: Certain lenders charge an origination fee for making the loan.|
|Notary fees||Somewhat: You might pay a notary fee if your state requires loan paperwork notarization.|
|Title search fees||Somewhat: A title search detects issues with the home, such as liens, which could complicate the HELOC process. You might pay this prior to closing.|
|Application fees||Somewhat: Certain lenders charge a fee to apply for the loan.|
HELOC lenders may charge other fees, such as a monthly or annual maintenance fee and a prepayment penalty if you pay off your line of credit ahead of schedule.
Am I obligated to take the HELOC once I apply and get approved?
If you’re approved for a HELOC but don’t need it after all, you should have an opportunity to cancel.
Canceling means you won’t have access to the credit line. But you won’t have anything to pay back since you’re not borrowing anything from the lender.
If you think you might cancel, it’s essential to understand the timing. Most lenders give a three-day window to cancel a HELOC in writing.
Check out our HELOC guide to find out more about this option.
Author: Rebecca Lake