If you’ve been hearing about a financial vehicle called a HELOC – a home equity line of credit – and are wondering if it would work for you, we have some details. It’s an exciting prospect – the idea of paying of your home quickly, being debt-free and having fewer financial worries. But will you qualify for a HELOC?
First, a little background on the HELOC itself. A HELOC is a loan that’s set up as a line of credit, can be drawn from up to a certain dollar amount, has a “draw period” where you use it like a checking account, and a repayment period, usually lasting 10 to 20 years. It uses simple interest calculated daily based on the amount you owe as opposed to amortized interest, calculated monthly. And a first-lien HELOC (one that takes the place of your mortgage) can be a way to put your whole paycheck to work each month to pay down your mortgage fast.
Will You Qualify for a HELOC? First, Investigate Your Financial Situation
Every person’s financial picture and goals are different. For that reason, understanding your personal financial situation is key to whether you can put a HELOC to work for you. So dig in – check on your credit score. And look at your current monthly expenses to see if you’re making more than you spend each month. In addition, see how much equity you have in your home. Then, think about the financial goals you have for your family.
No matter what, taking time to evaluate your current financial situation is a good thing to do. After this exercise, you’ll be better informed about whether a HELOC could help you pay down your mortgage more quickly and give you full control of your equity.
However, there’s a good reason the question, “will you qualify for a HELOC?” even exists. Every financial vehicle has a set of requirements. Just like a mortgage, there are minimum qualifications for a home equity line of credit. Remember, this is just a starting point. It’s not a definitive list of what’s required.
First, the positive side.
You might be a good candidate for a HELOC if you:
- have a credit score of 660 or higher
- spend less than you make each month
- have had no financial trouble in the last 4 years – like a bankruptcy or short sale
- are financially disciplined (particularly with your spending!)
- have at least 10% equity in your home
- have few other debts and plan to keep it that way
- are determined to gain financial freedom
- are motivated to see the process through
Now let’s turn it around and look at some signs that you may not qualify.
Reasons a HELOC might NOT be the best fit for you include:
- having expenses roughly equal to your monthly income
- a credit score below 660
- recent financial trouble like foreclosure or bankruptcy
- difficulty controlling your spending
- sizeable debts like credit card or college debt
Obviously, HELOCs aren’t the right financial approach for everyone. But there’s never been a better time than now to find out if a HELOC could work for you – or if it’s a bad idea considering your current financial situation. For that reason, we encourage you to keep exploring. You can learn more about HELOCs by downloading the free eBook here or exploring our resources section.