When it comes to getting a home equity line of credit (HELOC), there are several factors that lenders take into account in order to determine your eligibility, loan amount, and interest rate. Here are the key things lenders may look at before approving your HELOC application:
Equity in your house: HELOCs are essentially loans that are secured by your home equity, so the more equity you have built up in your house, the better your chances of getting approved for a larger loan amount and a lower interest rate. To calculate your equity, simply subtract your outstanding mortgage balance from your home’s current market value.
Loan-to-value ratio (LTV): Lenders also consider your loan-to-value ratio, which is the percentage of your home’s value that you borrow through the HELOC. A lower LTV generally indicates less risk for the lender, which could translate to a better interest rate for you. Most lenders prefer an LTV of 80% or less.
Debt-to-income ratio (DTI): Your debt-to-income ratio is another important factor that lenders evaluate when considering your HELOC application. This metric measures your monthly debt obligations (such as mortgage payments, credit card bills, and car loans) as a percentage of your monthly income. A lower DTI typically indicates better financial stability and a higher likelihood of being able to repay the HELOC.
Credit score: Your credit score is also a critical consideration for HELOC lenders. A high credit score can help you qualify for a larger loan amount and a lower interest rate, while a lower score could lead to a higher interest rate or even an application rejection.