HELOCs the next home credit product? (2024)

FAQs

What disqualifies you for a HELOC? ›

You may be disqualified from opening a HELOC if you do not meet the lender requirements. This may include low equity in your home, inadequate income or a low credit score.

To get approved for a HELOC, your credit score should fall in the mid-to-high 600s—though a score of 700 or higher is even better. Having good credit can also qualify you for a better interest rate.

Cons of a home equity line of credit

While home equity loans come with a fixed interest rate, HELOCs have variable rates. This means that your rate can go up or down based on economic conditions, the Fed's monetary policy and other factors, which in turn affects your payments.

Common requirement: 680

HELOC credit score requirements typically start at 620, but most lenders are looking for scores of 680 or higher. To qualify for favorable terms, your best bet is to have scores in the 700s.

These requirements involve all of the following: Your equity: Most lenders require borrowers to have at least 20% equity in their homes to qualify for a HELOC, though some lenders may approve your loan if you have slightly less equity and a strong overall application.

Often, HELOC denial is due to factors within your control, such as a low credit score, insufficient home equity or poor debt-to-income ratio. You may also be denied because you have an unstable employment or income history—meaning you haven't made enough money consistently to be considered low-risk.

There isn't a set income requirement for a HELOC or home equity loan, but you do need to earn enough to meet the DTI ratio requirement for the amount of money you're hoping to tap. You'll also need to prove that you have income consistently coming in.

However, the average time from application to approval for a HELOC is around 2 to 6 weeks. Underwriting is generally the part of the process that takes the longest, which can be anywhere from a week to 30 days or longer.

What Is a Good Alternative to a HELOC or a Home Equity Loan? You can use a cash-out refinance or a loan from your 401(k) if you need a large lump sum for a fixed expense.

Is HELOC loan a bad idea? ›

It's important to keep in mind that if you are unable to make loan payments on a HELOC, your lender may foreclose on your home. Additionally, taking out a HELOC can be risky if you're unable to make payments or if the value of your home decreases, as you could end up owing more than your home is worth.

Key takeaways

A HELOC (home equity line of credit) can be a useful tool for paying off credit card debt, as it often has a lower interest rate and a long repayment period. Using a HELOC to pay off debt comes with risks, such as the potential to accrue more debt or even lose your home if you cannot make payments.

But qualifying for a HELOC requires enough home equity, a good credit score, a low DTI ratio, and proof of income. If you don't think you'll qualify for a HELOC or are not sure if it's the right borrowing solution for you, consider alternatives like a cash out refinance, home equity loan, or personal loan.

How much equity you have in your home and your debt-to-income (DTI) ratio are also important considerations. If you have bad credit, which generally means a score less than 580, you probably won't qualify for a home equity loan. Many lenders require a minimum credit score of 620 to qualify for a home equity loan.

Getting a home equity loan with bad credit generally requires you to have low monthly debts, a credit score of 620 or higher, and a home value of 20% more than you owe. Taylor Getler is a home and mortgages writer for NerdWallet. Her work has been featured in outlets such as MarketWatch, Yahoo Finance, MSN and Nasdaq.

Qualifying for a HELOC

You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage.

The most critical HELOC requirement is an assessment of the combined loan-to-value (CLTV) ratio on your property that an underwriter will perform. CLTV is calculated by dividing the sum of the remaining balance owed on your mortgage and all the other loans tied to your property by the appraised value.

Lenders typically look at your home equity, your loan-to-value ratio, your debt-to-income ratio, and your credit score before they decide whether or not you qualify for a home equity line of credit. These numbers can also affect the interest rate they might offer you on a HELOC.