6 things HELOC lenders love to see in an application

Being a homeowner isn’t all it takes to get a HELOC. When you apply, the lender will look at your financial situation and a whole range of factors. The time it takes to get a HELOC varies, but you can help the lender process your application as efficiently as possible by showing up prepared. Follow these tips. Once you know what lenders love to see in an application, you can put yourself in the best position to be approved.

1. A strong credit profile

When you apply for a home equity line of credit (HELOC), the lender needs to know how likely it is that you’ll repay them. Here’s where your credit score comes into play. Lenders have varying credit score requirements. You may only need a credit score in the mid- to high-600s to qualify.  

The higher your credit score, the less risky you appear to lenders. That’s why borrowers with higher credit scores are more likely to be approved. Also, having a higher credit score could help you qualify for a lower interest rate. 

2. A history of paying your bills on time  

When you apply for a new gig, the organization wants to see you have the experience to do the job. Similarly, when you apply for a HELOC, the lender wants to know if you have a history of on-time payments. To find out, they’ll look at your credit history. 

Your credit history shows how you’ve handled credit products (credit cards, mortgages, auto loans, student loans, and personal loans) in the past. Your monthly payments for the past two years show up on your credit reports, with an indication of whether each payment was on time, late, or seriously delinquent. 

Some lenders may automatically disqualify an applicant who has open collection accounts, which can make it harder for borrowers hoping to use a HELOC to consolidate debts. If you have collection accounts, consider working with a lender who is willing to offer some flexibility in this area.

3. Sufficient home equity 

The way a HELOC works is that you borrow against your home equity—that’s the difference between how much you owe on your mortgage and the value of your home. 

Home equity matters in two ways: eligibility and loan amount.

Eligibility. Most lenders cap the amount you can owe on your home. This is called the LTV or loan-to-value ratio and it includes your primary mortgage (if you have one) and the HELOC you want. 

Let’s say your lender’s maximum LTV is 80%, your home is worth $500,000 and your mortgage balance is $250,000. Your current LTV is 50%. You are eligible to borrow a HELOC worth up to $150,000.

Loan amount. In the example above, you could borrow up to $150,000 from this lender. However, if your home value is lower, your loan limit would also be lower.

4. Stable income 

You’ll need to show the lender that you can afford to make your payments. One way to do this is to show that you have a stable income. It may be harder to get approved for a HELOC if you can’t document any income, or if you haven’t been in your job very long. 

With your HELOC application, you’ll be asked for proof of your income, like paychecks and tax returns. 

5. Affordable levels of debt 

Lenders measure whether you can afford the payment on a new loan by looking at your debt-to-income ratio. That’s a measure of how much of your income you spend on debts and housing each month. 

To calculate your DTI, total up all of your monthly minimum debt payments. Then divide that number by your after-tax monthly income.

A lower result shows lenders that you have enough money each month to cover the payment on the loan you want. Lenders all set their own DTI limits, but they’ll typically look for a ratio of 43% or less. 

If you’re using a HELOC to consolidate debts, talk to the lender about your goals. It’s possible to calculate your DTI using the expected payment amount on your new loan, and in the context of certain debts being paid off.

6. A co-signer with a solid profile 

A co-signer shares the responsibility of repaying the HELOC. You don’t have to apply with a co-signer, but if you do, it could help you qualify for the loan. If both applicants work, for example, it’ll be that much easier to show enough income to afford the payment on the loan you want.

Lenders will assess the co-signer’s credit score and history as well as yours. A co-applicant with a high credit score, stable income, and history of managing their debt well may be able to help you get the loan you want at terms you’re happy with.