How to Get a Home Equity Line of Credit
Key Takeaways
- You need sufficient home equity, qualifying credit, and stable income to be eligible for a HELOC.
- Gather documents like identification, income verification, employment information, tax returns, and bank statements before applying.
- Getting a HELOC typically involves an application, home appraisal, underwriting, approval, and closing.
- With a Freedom Mortgage HELOC, you begin repaying principal and interest immediately and can become eligible for redraws as you pay down your balance.
Using a HELOC to access your home's equity can allow you to borrow without your current home loan changing. A HELOC is a flexible loan that often comes with a lower rate than credit cards. If you want to benefit from these features and access your equity for important goals, it's helpful to know how the process of getting a home equity line of credit works.
This guide will explain what’s required to get approved for a home equity line of credit and how to go through the application process.
1. Make Sure You Qualify for a HELOC
The first step in getting a home equity line of credit (HELOC) is to make sure you meet the requirements. While these can vary slightly by lender, here’s what you typically need to qualify:
- A fair or good credit score: Your credit score is a quick, simple way for lenders to determine if you’ve been responsible with borrowing. Some lenders require a minimum credit score of 680 to 720 to qualify for a HELOC, although others may be more flexible.
- Proof of income: Lenders like to see stable employment (often at least a year or two) and proof that you have enough income to pay the debt. You don’t want your debt-to-income ratio (DTI)—the ratio of what you owe to what you earn—to be too high, which is usually around 36% to 43%, depending on the lender, your property state, and your credit profile. Some lenders allow a DTI as high as 50%.
- Equity in the home: Lenders usually cap total home equity borrowing at about 80-85% of your home’s value. This means all the loans you have on your home, including your primary mortgage and your HELOC, can’t add up to more than 80-85% of your home’s value. You’ll likely need to get an appraisal to determine its value.
How Much Equity Do You Need to Get a HELOC?
Lenders typically require you to maintain at least 15% to 20% equity in your home after your HELOC closes, taking into account both your existing mortgage and HELOC. This means your maximum combined loan-to-value ratio is generally 80% to 85%.
You can estimate your buying power by subtracting your current mortgage from your home's value. However, this is just an estimate. Your lender may require an appraisal to confirm the fair market value of your home.
Pro Tip
For example, if a home is worth $500,000 and there’s a $400,000 balance on the mortgage, a borrower may be able to get up to $25,000 with a HELOC if their lender allows them to borrow up to 85% of their home’s appraised value after the HELOC closes. If the lender’s limit is 80%, the borrower may not have any equity available.
2. Gather What You Need to Apply for a HELOC
Although lenders have different application processes, most lenders require you to submit certain key documents when applying for a HELOC. Here are some of the things you may want to have ready when you apply.
- Identification: You will need a primary ID, such as a driver’s license, passport, or other government-issued photo ID, acceptable to your lender, to prove your identity. You may also need proof of your current address, such as a recent utility bill.
- Income verification: You should be ready to provide pay stubs, bank statements, or other documentation showing your income and where it comes from. Lenders typically want to see evidence of at least one to two years of stable income to give you a loan.
- Proof of employment: Lenders need to confirm that your current employment status. They may need a letter from your company or your employer’s contact details to verify your position.
- Tax returns: Tax returns from the prior two years can provide helpful financial details to lenders, including confirming income and expenses. Tax returns are especially important if you’re self-employed.
- Bank statements: Finally, most lenders want to see that you have assets available to cover costs if needed.
3. Submit Your HELOC Application
When you have your documents in place, you’re ready to apply.
Depending on the lender, you may be able to submit an application online, via phone or email, or in person. You’ll need to provide your financial details and details on your home, so completing the application process can take anywhere from a few minutes to an hour or more.
Lenders may provide conditional approval, dependent on the home appraisal and underwriters verifying all information. Getting conditional approval can take anywhere from a few days to a few weeks, with most lenders falling somewhere in the middle on the timeline.
A Fast, Simple Way to Get Cash
With a Freedom Mortgage HELOC, you may be approved in as little as five minutes and get your cash in as few as five days.
Learn More
4. Complete the HELOC Home Appraisal and Underwriting Process
Once you have preliminary approval for your HELOC, your home will be appraised by a professional to determine its fair market value.
The home appraisal is necessary so the lender can make sure you have enough equity to borrow. Equity is not solely determined by how much you have paid your loan down. Your home's current condition and market factors affect the value of the home.
An underwriter will also conduct a careful review of your file to verify all the information you provided and evaluate the risk the lender is taking by giving you a loan. The underwriter must approve the HELOC before the process can move forward.
5. Close on Your HELOC
After you’re approved, you’ll close on your HELOC. The process can take between several days to weeks from application to closing. At closing, you will need to sign paperwork, so make sure to bring your ID to prove your identity. You will also review the loan terms and sign all of the paperwork agreeing to the HELOC's terms and conditions.
You have a 3-day right of rescission after closing, which means you can change your mind and cancel the loan without penalty within that time. Your funds won’t be distributed until after the recission period ends.
6. Access Your HELOC Funds
After final approval for your HELOC with Freedom Mortgage, you receive a lump sum payment to use as you'd like. You'll begin paying principal and interest, and as you repay a portion of your loan, you can request a redraw. Your redraw will not necessarily have the same rate as your existing loan. It will be a fixed rate set at the time of the draw, based on market conditions at the time.
7. Pay Back What You’ve Borrowed
Your payments will start right away once you borrow. While some HELOCs have variable rates and allow you to pay interest only for a period of time, the Freedom Mortgage HELOC works differently. You will begin paying principal and interest immediately based on a set schedule you and your lender agreed on.
HELOC Draw Period
HELOCs typically have two separate periods: a draw period and a repayment period. During the draw period, you borrow as needed and make interest-only payments based on your current balance. However, with Freedom Mortgage’s HELOC, you will become eligible for redraws as you pay down your existing balance.
HELOC Repayment Period
With a traditional HELOC, once your loan enters the repayment period, you must begin repaying principal and interest, and you can no longer access your credit line. Again, Freedom Mortgage's HELOC works differently, and you will repay your principal and interest from the start of your loan.
Final Thoughts: Ready to Apply for a HELOC?
Now you know how to prepare to apply for a HELOC so you can take advantage of this flexible loan option.
If you think this type of loan is right for you, contact Freedom Mortgage to get started on a HELOC application today.
Christine Rakoczy has been a financial writer since 2008, contributing to major publications, including Credit Karma, CBS MoneyWatch, WSJ, and Forbes Advisor. While her special focus is diving deep into mortgages, Christine has extensive experience with all types of financial topics.
In addition to writing for online articles, Christine has also taught business administration courses at a career college and has served as a subject matter expert on numerous business and legal courses.
Christine earned her JD from UCLA School of Law in 2008 and has a BA in English, Media, and Communications, with a Certificate in Business Administration from the University of Rochester.
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