Life may be a bit unpredictable these days, but if you are a homeowner, qualifying for a home equity line of credit (HELOC) may give you some peace of mind while you tackle any financial obstacles that come your way.
A HELOC is a loan that uses your home's equity — the difference between what you owe on your home and what your home is currently worth — to help you pay for home improvement projects, your child's education or other expenses, like consolidated medical bills or credit card debt. With so many people working and learning from home, this is a great time to renovate or add on a home office or extra space for your kids.
Qualifying homeowners may be approved to borrow a certain amount of money and access the funds as needed. For example, if you are approved for a HELOC of $10,000 you can choose to use part of it to pay off medical bills now and the other part to pay for a home office remodel in the fall. If you do not end up withdrawing any money, you will not owe anything on the loan.
A HELOC that offers no annual renewal fees may be more affordable than making large purchases by credit card or starting another type of loan. Read on to learn how to qualify for a HELOC and the benefits of choosing WaFd Bank for your HELOC.
Basic HELOC Qualifications
Although the qualifications for a HELOC vary by bank lender, one basic qualification is your credit score. You may still be able to qualify for a HELOC if your credit score is lower than the minimum required by the lender, but you may be approved at a higher interest rate. Click here for details on WaFd's HELOC. Make sure to do your homework to determine if a HELOC is a cost-effective option based on your interest rate.
There is typically a “draw period” where you can withdraw funds from the HELOC without paying additional fees. Also, during the “draw period” you only pay interest on the amount withdrawn. This draw period varies by lender. WaFd Bank's draw period is 10 years. After that point, you will begin paying on your outstanding loan balance. The loan balance is repaid with monthly payments amortized over a certain number of years (15 years through WaFd Bank).
General HELOC Requirements
In addition to your credit score, bank lenders also look at your debt-to-income (DTI) ratio and your loan-to-value (LTV) ratio (how much you owe compared to the value of your home) when determining whether you qualify for a HELOC.
Affordable DTI ratio: Much like determining how much house you can afford to buy when qualifying
for a mortgage, the DTI ratio helps lenders determine the maximum line of credit they can offer based on what you
The ratio is determined by dividing your monthly debt obligations by your gross income (the amount you make before taxes and other deductions). What is included in the monthly debt obligations varies by lender and may include home loans, car payments, student loans, minimum credit card payments and other expenses. Aim for a DTI ratio of 40% or less when considering a HELOC.
Good LTV ratio: Bank lenders will look at how much equity is in your home before approving you for
a HELOC. To do this, they will assess your current LTV ratio (a percentage calculated based on your current loan
balance divided by your home's current appraisal value). Lenders often look for a LTV ratio up to about 80%.
For example: If your home is worth $100,000 and you owe $75,000, your LTV ratio is 75% and you may qualify for a HELO.
Check out WaFd Bank's HELOC calculator to quickly estimate your interest-only payments based on your estimated HELOC.
Choosing WaFd Bank as Your HELOC Lender
If you are interested in learning more or applying for a HELOC, WaFd Bank is here to help. We offer:
- HELOCs for primary homes, second homes and investment properties (this includes jumbo HELOCS up to $700,000)
- No annual renewal fees
- Competitive interest rates (and a 0.25% discount off your interest rate for automatic monthly payments from any WaFd checking account)
- Interest-only payments for 10 years
- Zero closing costs for owner occupied and second home customers with existing home loans through WaFd Bank seeking up to $250,000 in lines of credit
Contact us today to see if a HELOC is right for you or to learn more about our other home loan solutions.
MEMBER FDIC, Equal Housing Lender, All loans subject to credit approval
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*Texas HELOCs: Notice concerning extensions of credit defined by section 50(a)(6), article XVI, Texas constitution: Section 50(a)(6), article XVI, of the Texas constitution allows certain loans to be secured against the equity in your home. Such loans are commonly known as equity loans.