How to apply for a HELOC: A complete guide

This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not currently offer home equity lines of credit (HELOCs) in all states. Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.

One of the benefits of owning a home is growing your equity stake. A home equity line of credit (HELOC) allows you to access that equity without selling your home. There are many valid reasons for considering this option, ranging from debt consolidation to reinvesting in your property via home improvements.

HELOCs may be more flexible than alternative options like home equity loans or cash-out refinances. That flexibility comes from the way they’re structured.

How does a HELOC work?

Most HELOCs are second mortgages. That means you’re probably applying for an additional loan against your property. They function similarly to conventional loans but with some key differences.

You’ll need to apply for the loan through a lender. (More on the requirements in a moment.) If you’re approved, you’ll be responsible for paying closing costs on the loan. Once you’ve closed the loan, you’ll be granted a credit limit based on the equity you’ve built up.

You can borrow against that credit limit during the “draw period” of the loan. The length of the draw period varies by lender, but three to ten years is common. During this time, you can borrow against your credit limit as many times as you’d like, and you’re only responsible for paying interest on what you borrow.

Once the draw period ends, the repayment period begins. You’ll no longer be able to borrow against your credit limit, even if you didn’t use all of it. You’ll still be responsible for your original mortgage and need to make principal and interest payments on the HELOC.

HELOC requirements

Your lender will review the same elements they would for a mortgage application, but they’ll also pay attention to the equity you’ve built, specifically your loan-to-value (LTV) ratio.

• Loan-to-value ratio: LTV ratio is calculated by dividing your remaining mortgage balance against the appraised value of your home. The lower your ratio, the more equity you’ve built in the home. Most lenders prefer to see an LTV ratio of 80% or less for a HELOC, but the exact ratio will vary by lender.
• Credit score: Your lender will also review your credit score as part of the application. The exact minimum will vary by lender and the holistic review of your application.
• Debt-to-income (DTI) ratio: Lenders want to verify your income and calculate your DTI ratio. The lower your DTI ratio, the stronger your application will be in the eyes of lenders. Again, the exact threshold will vary by lender and how all the elements of your application fit together.
• Good payment history: Ensure your original mortgage is in good standing before applying for a HELOC. A history of late or missed payments could result in your application being denied.

How to apply for a HELOC in 5 steps

If you think you can meet the HELOC requirements and want to tap into your equity, here are the steps to apply for one.

1. Shop lenders

It’s worth taking the time to review different lenders. They can have varied requirements and offer different interest rates and closing costs. Some of them even offer promotions, for example, waiving the origination fee or paying a portion of your closing costs. You don’t need to get a HELOC with the same lender that issued your first mortgage.

2. Submit application

Once you’ve chosen a lender, it’s time to gather documentation and submit your application. Common mortgage documents they’ll need include:

• W-2s
• Bank statements
• Tax returns
• Pay stubs
• Proof of identification

You can usually apply online or in person if you prefer a brick-and-mortar experience. If your lender requests additional documentation, be sure to provide it as quickly as possible to avoid delaying your application processing.

3. Get a home appraisal

Before your application can be officially approved, you’ll need to get a home appraisal. This will serve as a professional assessment of the current value of your home. It’s the value lenders will use to calculate your LTV ratio. Some lenders may cover the appraisal cost, while others will expect the borrower to pay. The average cost for a home appraisal is $357.ec-angi-home-appraisal-cost Some lenders may opt for automated valuation models (AVM), essentially statistical modeling run by software, to save time and costs.

4. Close on the loan

After the appraisal, the lender will either reject your application or allow you to close on the loan. You’ll be responsible for filling out the necessary paperwork and paying the closing costs. These usually include lender fees for administrative work and another title search.

5. Begin the draw period

Once you’ve closed on the loan, you’re free to start borrowing against your credit limit. One of the benefits of a HELOC compared to a home equity loan is the flexibility you have to make multiple withdrawals or borrow less than you qualified for.

You won’t be able to make withdrawals once the draw period ends. At that point, you’ll also be responsible for repaying what you borrowed, plus interest payments. You’ll still be responsible for making payments on your original mortgage throughout this process, as well.

How long does it take to get a HELOC?

The exact timeline will depend on the lender you use, the strength of your application and how long it takes to get a home appraisal. Typically, HELOC applications can take up to six weeks to close, but the faster you can supply your lender with all of the required information, the faster they can process your application.

Common mistakes to avoid when applying for a HELOC

If you’re feeling intimidated by the process, the good news is plenty of borrowers have gone through it. You can benefit from their experiences to avoid these common mistakes when applying:

• Forgetting to shop lenders: If you don’t shop for lenders, you could miss out on deals or better interest rates that would have saved you significantly over the life of the loan.
• Not considering alternative loan options: HELOCs can be a great option, but they aren’t the only refinancing choice. Do your due diligence on cash-out refinances and home equity loans, too. Chase does not offer home equity loans at this time.
• Overlooking lender requests: If your lender asks for additional information, provide it as quickly as possible. If you’re uncomfortable, ask if alternative documentation would work. Failure to do so can lead to delays in processing your application or even rejection.
• Failing to review the terms and conditions: Be sure to go through the loan language thoroughly with your lender and ask questions. Variable interest rates or prepayment penalties can be unwelcome surprises if you aren’t prepared for them.
• Using the funds frivolously: An example would be tapping into your equity to take a vacation. Accumulating more debt can limit your financial options. Depending on how much you use, you could be repaying the HELOC years after the draw period ends.
• Overborrowing: Just because you’re approved to a certain amount doesn’t mean you should use it all. You’ll need to continue making payments on your original mortgage, and once the draw period ends, you’ll make principal and interest payments on what you’ve borrowed. Plus, you’ll want to be prepared for unexpected expenses.

In summary

A HELOC is a powerful tool that allows you to access your equity while maintaining possession of your home. Make sure to use them wisely and that you’re prepared to handle both your original mortgage and HELOC payments long after the initial hurdle of the application.

If you’re worried about juggling two loan payments on your home, cash-out refinances replace your current mortgage with a new loan. This allows you to access your equity while managing just one mortgage payment. Contact a home lending advisor to learn more about cash-out refinances.