A Home Equity Line of Credit can be a great way to obtain extra cash when you want to invest in home improvements and remodeling, or want to pay off high-interest personal loans and credit cards. But how do you apply, and what is the fastest way to get approved and get access to those funds?
Getting a HELOC the Traditional Way
To qualify for a traditional HELOC, you will need to meet a few requirements in regards to your income, credit and percentage of equity in your home. The exact requirements vary by lender, but let's take a look at the most common conditions.
The first and, arguably, most important metric lenders look at when you apply for a HELOC is your credit score. Most lenders require a FICO® score of at least 620 to qualify for a HELOC, but the minimum could be set as high as 680. Some will approve you with a score under 620 if you have a low debt-to-income ratio or a high percentage of equity in your home.
As mentioned above, your debt-to-income ratio also matters. This ratio tells a lender whether or not you can afford to make payments on your line of credit, and is calculated by totaling your monthly debt payments, as well as other financial obligations, and dividing that number by your total monthly income. The resulting percentage is your debt-to-income ratio. Most lenders abide by guidelines set by the Consumer Financial Protection Bureau, which recommends a debt-to-income ratio below 43%. Regardless, the lower this percentage, the easier it will be to qualify for a HELOC. Lenders will also evaluate your payment history on other loans to ensure you make payments on time and determine how risky it will be to lend you money.
You will also need to prove that you have a steady income so that lenders can be confident you’ll pay back your line of credit. Typically, providing pay stubs or your most recent W-2 is sufficient.
Next, you need to have enough equity in your home. Lenders usually look for at least 15 to 20 percent of equity compared to your home’s value. To determine your equity, subtract the amount you owe on your mortgage from the current value of your home. For example, if you owe $200,000 on your mortgage and your home is valued at $350,000, your home equity is $150,000 (or 43%).
Once the lender has received and evaluated the above information, you’ll receive an initial decision within a few days. However, rather than taking your word for it, many lenders will perform a home appraisal of their own to confirm the equity amount. This process involves a professional visiting your property to assess its value based on location, age, recent home improvements, curb appeal, nearby attractions and the current housing market.
The above steps can take a few weeks to complete before you receive a final decision on whether or not you have qualified for a HELOC, and you will likely pay fees associated with the service. Then, once you get a green light from the lender, you’ll need to visit the office to sign paperwork and then wait about three days before accessing your funds through online transfer or issued checks. The entire process can take a month or longer, and typically involves closing costs of 2% to 5% of the loan amount, as well as fees for origination, appraisal, inactivity and early termination.
Getting a HELOC Card
Don’t have a month to wait? A HELOC Card might be a better option. A HELOC Card is backed by your home’s equity, just like a traditional HELOC, but it can take as little as 15 minutes to qualify. To apply, you will still need a credit score in the mid-600s, depending on your equity and debt-to-income ratio, proof of a steady income and enough equity in your home.
However, you may be allowed to skip the home appraisal (eliminating any appraisal fees) and sign the closing documents via an online notarization session, which substantially shortens the approval process. The card typically arrives in the mail within a few days, and after the three-day waiting period, you can use it anywhere credit cards are accepted.
A HELOC Card also has significantly lower fees than a traditional HELOC. Skipping the appraisal means you’ll only incur charges for late payments, insufficient funds, and taking out cash.
Deciding between a HELOC Card and traditional HELOC
When considering whether a traditional HELOC or a HELOC Card is the right choice for you, keep the similarities and differences discussed above in mind. Some people may feel more comfortable signing papers in person or may want to give their favorite bank their business. If this sounds like you, a traditional HELOC may be the way to go. However, if you're looking for the fastest and most affordable way to make your home equity work for you, a HELOC Card may be the best option.
Are you considering applying for a HELOC and looking for the fastest way to do it? Aven can have you approved in as little as 15 minutes. Find out more!
