How to get a home equity line of credit (HELOC)
Quick insights
- To apply for a HELOC, compare mortgage lenders and submit documentation like proof of income and employment verification.
- Lenders also review home equity, income, credit history and existing debt obligations.
- Eligibility requirements vary by lender, but many look at similar factors when you apply.
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. HELOCs may be more flexible than alternative ways of tapping your home equity, such as home equity loans and cash-out refinances.
Let’s review how HELOCs work, including common eligibility criteria and application steps.
What is a HELOC and how does it work?
A HELOC is a secured revolving line of credit with a limit based on the equity in your home. It works much like a credit card, giving you an approved limit you can use as needed. Lenders review various factors to set this limit, such as your home equity, income, credit history and existing debt. Unlike a credit card, a HELOC is a secured loan because your home serves as collateral.
Here are some common use cases for a HELOC:
- Home renovations and repairs
- Debt consolidation
- Education expenses
- Medical bills
- Purchasing an investment property
- Other major expenses
Many HELOCs have a draw period followed by a repayment period. During the draw period, you can borrow up to your available limit, and your required payment may depend on your lender’s terms (for example, interest‑only or principal‑and‑interest payments).
When the draw period ends, the repayment period begins. At that point, you can no longer access additional funds. You must repay what you’ve borrowed, plus interest. If you still owe on your primary mortgage, those payments are still due throughout both the HELOC draw and repayment periods.
HELOC eligibility requirements
To qualify for a HELOC, you must meet lender requirements, which vary from one company to the next. Lenders review many of the same factors they use for a mortgage application. They’ll also need to know exactly how much home equity you have.
Specific requirements vary by lender, but here are the common criteria to qualify:
- Home appraisal: Many lenders require an appraisal before approving your HELOC. This determines your property’s current market value and helps calculate the HELOC’s limit.
- Sufficient home equity: Many lenders require you to maintain a certain amount of equity in your home after opening a HELOC. The exact limit varies.
- Credit profile: Lenders consider your credit history and score, among other factors. Higher scores may help you qualify and may improve pricing.
- Debt-to-income ratio (DTI): Lenders review how your monthly debt compares to your income. Lower DTI ratios can help, but requirements vary.
- Stable income and employment: You will need to prove you have reliable income. Whether you’re salaried, hourly or self-employed, you can do this through documents like paystubs, W-2s, tax returns and bank statements.
- Strong payment history: Lenders look for a history of on-time payments on your mortgage and other debts. Recent late payments, loan defaults or collections accounts may make it more difficult to qualify for a HELOC.
How to apply for a HELOC in 5 steps
Applying for a HELOC is similar to applying for a mortgage. You may want to compare mortgage lenders; once you choose one, the application usually requires personal details and financial documents. The lender reviews your application and orders an appraisal before you reach closing.
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 lenders may offer limited-time promotions that can reduce certain fees or closing costs, but availability and terms vary by lender and borrower.
2. Submit application
Once you’ve chosen a lender, it’s time to gather documents and submit your application. Common mortgage documents needed include:
- W-2s
- Bank statements
- Tax returns
- Paystubs
- Proof of identification
You can usually apply online or in person if you prefer a brick-and-mortar experience. If your lender requests additional documents, providing them quickly keeps the process moving.
3. Get a home appraisal
The lender will usually order a home appraisal. This will serve as a formal assessment of the current value of your home. It’s also the figure that lenders will use to calculate your loan-to-value (LTV) ratio. Some lenders may cover the appraisal cost, while others will expect the borrower to pay (usually several hundred dollars). Some lenders may use an automated valuation model (AVM), which is statistical modeling run by software, to save time and costs.
4. Close on the line of credit
After the appraisal, the lender will either reject your application or allow you to close on the loan. You’ll need to fill out the necessary paperwork and pay the closing costs. These usually include lender fees for administrative work, titling, etc.
5. Begin the draw period
Once you’ve closed a HELOC, you can begin borrowing against your available limit. HELOCs usually have a draw period of 5 to 10 years. You can withdraw as needed throughout this period and typically only pay interest on the amount you’ve borrowed.
Some lenders have specific rules for drawing and repayment, such as a minimum withdrawal amount, a minimum outstanding balance or an initial draw at closing. It’s important to review your HELOC’s terms for how and when you can access your funds.
HELOC vs. home equity loan
A HELOC and a home equity loan both allow homeowners to borrow against the equity in their home, but how you receive and repay the funds is different.
A home equity loan provides a lump sum of money upfront and typically comes with a fixed interest rate and fixed monthly payments. Because the loan amount, interest rate and payment schedule are established at closing, it can be a good option for homeowners who know exactly how much they need to borrow.
A HELOC provides access to a revolving line of credit that can be used as needed during the draw period. This flexibility may be useful if your expenses are spread over time or if you are unsure how much you will need to borrow.
Examples
Imagine you’re planning a home renovation and qualify to borrow $40,000.
- With a HELOC, you might withdraw $10,000 to replace your roof, then draw another $5,000 a few months later to update your kitchen. If additional expenses arise, you can continue borrowing from your available credit line until you reach your limit or the draw period ends.
- With a home equity loan, you would receive all $40,000 at closing and begin making payments on the full balance right away, even if your renovation costs are spread out over several months.
Potential mistakes when applying for a HELOC
If you’re feeling intimidated by the process, the good news is that plenty of borrowers have gone through it. You can benefit from their experiences to avoid these common mistakes when applying:
- Forgetting to shop lenders: By comparing lenders before you apply, you could find competitive HELOC terms that save money over time.
- Not considering alternative loan options: HELOCs can be a great option, but they aren’t the only product that leverages your home equity. Consider multiple potential options, such as cash-out refinances and home equity loans.
- Overlooking lender requests: If your lender asks for additional information, it’s important to reply. When in doubt, contact them to discuss the request. Failing to respond can lead to delays in processing your application or rejection.
- Failing to review the terms and conditions: Be sure to go through the loan language thoroughly with your lender and ask questions when you have them. 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 for years after the draw period ends.
- Overborrowing: Just because you’re approved for 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
Before applying for a HELOC, it’s important to know the qualification requirements, borrowing limits, fees and repayment terms. These can clarify whether a HELOC aligns with your financial goals or if another home equity product is a better fit. If you’re approved, you can access a HELOC during the draw period and repay only what you borrow before entering the repayment phase.
If you’re ready to apply for a HELOC, explore Chase’s HELOC and cash-out refinance products to learn more about our offerings. Our Home Lending Advisors are also here to discuss your goals and options.