How to get a home equity line of credit (HELOC)

A home equity line of credit (HELOC) lets someone borrow against the equity in their home and access a revolving line of credit. 

HELOCs and other loans like home equity loans and cash out refinances may be a good way to fund big projects. For example, cash pulled from a HELOC or a similar loan can finance home improvements, upgrades, or renovations.

This article explores what a HELOC is, how the revolving line of credit works, and some of the best alternatives to a HELOC.

Is a HELOC and a revolving line of credit the same?

A revolving line of credit is a loan you can tap into at any time up to a pre-determined amount. This means you don’t have to borrow more than you need.

A HELOC is a revolving line of credit secured against your home. You may lose your property if you default on the loan. 

Many other lines of credit, such as credit cards, are usually unsecured meaning they don’t require collateral like a property. 

How does getting a HELOC work?

To get a HELOC, lenders require you to have a minimum amount of equity in your home.

Lenders normally have other requirements for a HELOC. These can vary but may include a certain credit score or debt-to-income (DTI) ratio.

After getting a HELOC, you can tap into your home equity as needed to pull out cash. The benefit of using this revolving line of credit is that you don’t have to take out the full amount you’re qualified to borrow.

HELOCs usually come with variable interest rates that may go up or down depending on market conditions and other factors. 

Before jumping into a HELOC, it’s a good idea to shop rates and terms with different lenders. You may also want to compare HELOCs to similar products before committing to any loan.

Requirements for getting a home equity line of credit

All HELOC applications generally require a minimum credit score, loan-to-value ratio, DTI ratio, and income level. While specific requirements may vary, many lenders will normally check these four factors when evaluating applications.

Credit score

Credit score requirements vary significantly from one lender to another. However, working on getting a higher score may save you money by potentially getting you a lower interest rate.

Loan-to-value ratio

Loan-to-value, or LTV ratio, compares the amount of your mortgage with the appraised value of your home. For example, if your home is valued at $400,000, and you owe $100,000 on your mortgage, you would have an LTV ratio of 25% ($100,000 divided by $400,000).

A HELOC requires certain amount of equity in your home. Having more equity may mean better loan terms or interest rate offers from lenders.

DTI

Debt-to-income ratio, or DTI, represents how much of an individual’s income goes toward debt. This includes money that goes toward rent, mortgage payments, child support payments, and other expenses.

For example, someone earning $5,000 per month with $1,000 in debt obligations would have a DTI ratio of 20%.

Homeowners may qualify for a HELOC with a DTI ratio as high as 43%.

Income

To qualify for a HELOC, you will usually need to submit proof of income. Required income levels may vary based on your total home equity, home value, and other factors.

Alternatives to taking out a HELOC

HELOCs are not the best option for everyone. Fortunately, other types of loans similar to HELOCs are available — like home equity loans and cash out refinances.

If you’re looking to access your home equity, here are some HELOC alternatives to consider: