Taking control of your financial future is an important – and sometimes difficult – step to take. Many people are now turning to a Home Equity Line of Credit (HELOC) to help them pay down their mortgage quickly, save more for retirement or college expenses, renovate a current home, or create a safety net for unexpected financial situations. Whatever your reasons, a HELOC is a viable method for becoming debt-free more quickly than you’ve ever imagined. But you need to know how to prepare for your HELOC. Read on.
How to Prepare for Your HELOC: Typical Requirements
Here’s a snapshot of typical HELOC application requirements.
You might be a good fit for a HELOC if you have a credit score of 660 or higher, have more income than you spend each month, have few other debts, and have had no financial troubles in the last 4 years that led to bankruptcy or a short sale.
But there are 2 less measurable qualifiers.
To ensure success with this financial approach to wealth building, you also must have strong financial discipline. And you’ll need the determination to gain financial freedom and see the process through. Do you have discipline and determination? Let’s keep going, then.
Most people who meet mortgage requirements may also meet HELOC requirements. Because every bank and lending institution is different, there’s no way to know every standard. But this is a good place to start.
- Debt ratio below 45%
- Decent credit (660 and up)
- 10% equity (not necessarily a requirement, but recommended)
If you meet these basic requirements, that’s great! You’re ready to learn more and take the next step in the process. If you don’t know your debt ratio, credit score or how much equity you have in your home (along with your interest rate and what you owe on your mortgage), stop now and calculate it. You need this information to move forward. Without it, you don’t know how to prepare for your HELOC.
If you don’t meet those minimum requirements, that’s exactly where you should start.
1. Lower Your Debt Ratio
Your debt-to-income ratio measures the amount of your income that’s being spent each month. You can lower this ratio by increasing your income. Maybe you get a part-time job. Or, work overtime. You could even start a “side hustle” that provides extra cash. But the best way to improve your debt ratio is simple: pay off your debts. Pay down credit cards, only buy with cash, and don’t take on any new loans. This strategy ties in with the next area of improvement.
2. Improve Your Credit Score
It takes time to see a change in your credit score. However, a higher score will help you qualify for a HELOC with the most favorable terms. The first step is to pay your bills on time and in full. Pay off your debt and keep your credit card balances low. If you have unused credit cards, it might be tempting to close them out. But it’s best not to create too many inquiries on your credit score. Lastly, only apply for and/or open new credit cards when absolutely necessary.
3. Build Up Your Savings (or Pay More Down on Your Current Home)
If you’re interested in a HELOC but don’t have 10% equity built up yet, you may still be eligible. However, it doesn’t hurt to consider adding to your mortgage payment each month now. Your goal is to pay down your principal to make your HELOC even more effective when you do get it.
Now that you know more about how to prepare for your HELOC, you’re ready to discover more. To learn more about a Home Equity Line of Credit (HELOC) and how it can help reshape your financial outlook, download the free eBook here.