How To Apply For A Home Equity Line Of Credit (HELOC) In 6 Simple Steps

A home equity line of credit (HELOC) is one of the main ways homeowners can tap into their equity. Borrowers can use these funds for almost anything from home improvements to debt consolidation.

To apply for a HELOC, you’ll need to make sure you meet the basic requirements, confirm it’s the right loan option for you and follow the steps below.

Rocket Mortgage^® does not currently offer HELOCs.

Should You Apply For A HELOC?

Before applying for a HELOC versus a home equity loan, homeowners should consider several factors to ensure they’re making an informed and responsible decision. Of course, there are pros and cons to HELOCs. Here are some questions to ask yourself before committing:

• Do you have a defined purpose for the funds? Whether it’s for home improvements, debt consolidation or something else, homeowners should have a specific plan for what to do with the funds before applying for a HELOC. It’s too big of a financial commitment to make without a concrete purpose.
• Do you meet the eligibility requirements? We’ll cover them in more detail in the next section. But before moving to apply for a HELOC, make sure that you can qualify for one. Otherwise, your efforts might be better suited in improving your financial standing.
• Do you know how much you want to borrow? Due to the flexibility of HELOCs you may be tempted to make multiple withdrawals over the draw period. Make sure you go into the process with an idea of how much you need so that you don’t take on more debt than you must.
• Will you be able to repay what you borrow? Taking on debt comes with risks. Make a plan to pay it back before you take it out. If you can’t make the monthly payments, you could risk defaulting which would damage your credit score and could even result in foreclosure.
• Have you explored the alternatives? HELOCs aren’t the only way to access your equity. Rocket Mortgage offers home equity loans and cash-out refinances. Make sure to explore these options before committing to a HELOC.

HELOC Requirements

Just like mortgage requirements, the exact HELOC requirements will vary from lender to lender, but you typically need:

• Reliable income: Most lenders will ask for proof of income to make sure you are able to pay off your loan.
• Good credit: A credit score above 700 is considered ideal, but some lenders will approve a HELOC with a lower score.
• A good loan-to-value ratio (LTV): You should have at least 15% – 20% home equity, meaning, your loan amount should be no more than 85% of your home's value.
• Responsible payment history: Lenders may look back at your previous payment history to make sure you haven’t had late or missed payments.
• A low debt-to-income ratio (DTI): The lower your debt-to-income ratio, the better. DTI is the percentage that tells lenders how much you spend on monthly debt payments compared to how much money you have coming in.
• Professional appraisal: Your lender will help you with this, but no lender will issue a HELOC without getting a professional appraisal to determine the property’s value.

How To Apply For A HELOC In 6 Steps

Applying for a HELOC is similar to applying for other mortgage loans. Before applying for the loan, it’s best to calculate your home equity and LTV ratio, review your credit report for any issue and estimate your DTI ratio. If everything looks good to go, here are the next steps. 

1. Find A Lender

Keep in mind these tips for researching and selecting a reputable lender. Make sure you ask specific questions, such as what your fees and payments will be, what credit qualifications they require and what the interest rates are. It’s important to compare rates, terms and loan types such as the option to apply for a fixed-rate HELOC.

2. Gather Documents

After you’ve chosen a lender, you’ll need to fill out an application. You may be able to complete the application online, but some lenders may require you to physically come to the location. Be ready to provide proof of income documentation, such as bank statements, W2s or pay stubs. Check with your lender about what specific documents you’ll need. Having these documents ready will only lead to a smoother application process.

3. Get An Appraisal

An appraisal estimates how much your home is worth compared to other similar homes in the area and is especially important to help determine your maximum LTV ratio. For the best outcome, it helps to know what hurts a home appraisal, so you can avoid common mistakes.

4. Close On Your New Line Of Credit

Once your home has been appraised, your lender will let you know if you’ve been approved for a HELOC. They’ll also provide additional details, such as your credit line limit and interest rate. If you decide to proceed, you’ll sign your loan documents. This can also be online or in person, depending on the requirements of your lender. Keep in mind, you’ll owe closing costs at this point. If you can’t afford them upfront, you may have the option to roll them into your loan.

5. Start The Draw Period

A HELOC draw period is the amount of time you have to use the available credit from your loan. Many HELOCs give you a 10-year draw period to access funds but the specifics depend on your agreement with your lender. Throughout the draw period, you can withdraw as much as you need up to your established credit limit.

6. Pay Back The HELOC

Similar to a credit card, once your draw period ends, you’ll need to start paying back both the principal loan and the interest. When the draw period is over, your line of credit is closed and you can no longer draw from the HELOC. Typically, you'll have 20 years to repay the loan balance.

However, this can vary based on your lender and your loan terms. Your payments may stay the same with a fixed-rate HELOC, or they could increase or decrease if your HELOC has a variable interest rate (which most do). If your HELOC does have a variable interest rate they can change quite frequently, sometimes even on a monthly basis.

The Bottom Line: Make Sure A HELOC Is Right Before Applying

A HELOC can be a great way to pay for home improvements, education or to consolidate high-interest credit card debt. But there are many things to consider before applying for the loan. A HELOC is just one way homeowners can tap into their home equity. Another is to apply for a Home Equity Loan with Rocket Mortgage today!