How To Qualify For a Home Equity Line Of Credit?
Basically a home equity line of credit or HELOC is a revolving credit line that allows the homeowners to use their homes as security. These lines can be used for a variety of purposes such as education, home improvements, medical bills or major appliance or automobile purchases. Those homeowners who are interested in applying for a home equity line of credit should evaluate their financial situation and value of their home to determine if they will qualify. Lines of credit are available through banks, mortgage companies and credit unions that typically grant mortgage loans.
What is a home equity line of credit: – A HELOC is a line of credit that is secured by homeowner’s home that gives them a revolving credit line, in some ways like a credit card. The differences from other ways are that instead of borrowing from a credit card company the homeowners are borrowing from the available equity in their home and the house is used as security layer for the line of credit. Home equity lines of credit are often used to strengthen the higher interest rate debt on other loans such as credit cards or to repay for home improvement projects including those intended to increase the value of homeowners’ home.
Understanding the basics: – Here are some of the basic things which homeowners should know about the home equity lines of credit;
- Qualifying: – In order to qualify for a home equity line of credit the homeowners must have available equity in their home. In other words the amount they owe on their home must be less than the value of their home. Mostly lenders will allow the homeowners to borrow up to 85% of the value of their home minus the amount they owe. The lender will also typically look at the credit score layer and history, employment history, monthly income, and monthly debts of homeowners just like they did when homeowners first got their mortgage.
- The Index: – The index is a financial indicator used by banks to set rates on many consumer loan products. Mostly banks use The Wall Street Journal Prime Rate. The rate on the home equity line of credit is calculated from both the index and the margin.
- The margin: – The margin is the amount that is added to the index such as The Wall Street Journal Prime Rate to determine the interest rate for home equity line of credit of homeowner. The rate on home equity line of credit is calculated from both the index and the margin.
- The draw period: – The draw period or borrow period is the period of time during which the homeowners can access their funds to pay for expenses with their home equity line of credit. Depending on the terms the draw period will vary, but typically it will be up to ten years. The homeowners will receive home equity line checks or home equity line access card to pay for the expenses. At Bank of America, Online Banking is another helpful way to access the home equity line allowing homeowners to easily transfer funds to their checking account. When they pay for expenses and have borrowed against their home equity line of credit they will receive a monthly bill with a required minimum payment similar to the credit card.
Here are some of the tips to qualify for a home equity line of credit;
- The homeowners should evaluate their current debts in relation to their pretax income to determine whether the homeowner is a candidate for a home equity line of credit. The total amount of homeowners’ monthly mortgage, homeowner’s insurance, mortgage insurance, property taxes and the potential home equity credit line payment should be less than 28 percent of their total household income. When they include additional debts such as credit card payments, automobile loans or student loans then the total should be less than 36 percent of their total household income.
- Homeowners should obtain the copies of their credit report to view FICO scores and review the accuracy of the reported information. When evaluating credit reports for accuracy it is important to review reports from all three of the major credit bureaus that are Experian, Equifax and TransUnion. Generally the homeowners will need a credit score of at least 620 to qualify for the prime interest rate. Those applicants with credit scores less than 500 may have a difficult time qualifying for a home equity line of credit and they should focus on increasing their credit scores by paying their bills on time and decreasing their loan and credit card balances.
- They should review the terms of various lenders, making sure to consider the interest rates, annual percentage rates and any other fees associated with the credit line.
- Homeowners should arrange for the lender’s professional appraiser to visit their home for an assessment. They will want to ensure that homeowners own at least 20 percent of the equity in the house. If the home value has increased by 20 percent or more since it was purchased, the assessment will also be favorable.