Credit & Debt Financing Financing Options6 min read

How to Get a HELOC

A home equity line of credit (HELOC) is a mortgage loan you can use to access equity in your home on an as-needed basis, or you can use it as part of your financing structure when purchasing a home. Let’s review how you might use a HELOC, and how to get a HELOC if you determine it’s the right loan for you.

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A home equity line of credit (HELOC) is a mortgage loan you can use to access equity in your home on an as-needed basis, or you can use it as part of your financing structure when purchasing a home. Let’s review how you might use a HELOC, and how to get a HELOC if you determine it’s the right loan for you.

HELOC to Access Home Equity

A home equity line of credit does just what its name says: It allows you to have a predetermined maximum line of credit to tap into your home equity when needed using a checkbook or a credit card. If you owned your $400,000 home outright, you could get a home equity line of credit as a first mortgage. You might choose to have the max available line of credit be $200,000, giving yourself access to half of your home’s equity and preserving the other half.

The $200,000 in this example is the maximum available balance. You can use some or all of that money, pay it down, then access it again. If you never used any of the $200,000, you wouldn’t have a payment. Bills come on a monthly basis, and you’re only billed on what you use. Some HELOCs only require a payment of interest on the outstanding balance, and others can require a fully-amortized principal plus interest payment. Once you find a HELOC lender, they can brief you on HELOC payment options.

If you had a first mortgage of $200,000 on your $400,000 home, you could still access your home equity using a HELOC as a second mortgage. Most lenders require the sum of your first mortgage plus a maximum HELOC balance to be 90 percent or less than your home’s value. So on a $400,000 home value, your maximum available HELOC limit would be $160,000.

You may find a HELOC lender that will allow the sum of your first mortgage plus your HELOC max to be greater than 90 percent of your home’s value, but it will depend on the health of the U.S. economy and housing market at the time. The better the economic and market conditions, the higher your loan-to-value percentage can go, but 90 percent has remained a consistent cap for most lenders even in good times, which leaves some padding in case your home’s value declines.

Questions about HELOCs? Find a lender on Zillow who can help

HELOC for Home Purchase

Although HELOCs are often thought of as a refinance tool for existing homeowners to access equity, they’re also a common tool for financing a home purchase. The most common scenario for this is when you use a HELOC as a second mortgage when buying a home.

If you only had 10 percent down on a home purchase of $400,000, you could finance all 90 percent with a single first mortgage, but if you do, you’ll have the extra cost of mortgage insurance. You can avoid mortgage insurance by capping the first mortgage at 80 percent of the purchase price, and getting a second mortgage for the remaining 10 percent. This second mortgage can be a traditional fixed-rate second mortgage, or it can be a HELOC with a rate that can adjust monthly.

If you know you can only afford the monthly payments on the second mortgage over the longer term and don’t plan to pay it down, you may want to consider a fixed-rate second mortgage. But if you plan to pay down the second mortgage more rapidly and then want to use it as a tool to access home equity for other uses in the future, a HELOC may be the best option for you. Your HELOC lender can help you decide.

How to Qualify for a HELOC

Qualifying for a HELOC is a lot like qualifying for a traditional loan. Lenders will look at your credit quality, down payment (if you’re buying) or equity (if you’re a homeowner), and ability to repay.

Two factors influence your credit quality.

First, your credit score is an overarching representation of your credit quality. If your score is in the mid- to low 600s, you might not qualify for a HELOC, and your rate will be much higher if you do because HELOC rates are highly dependent on credit scores. The best HELOC rates will be for those with credit scores of 740 or higher.

Second, your credit history tells your lender about how well you’ve paid your bills on time in the past. Depending on the recency and severity of late payments and other derogatory credit history such as collections and bankruptcies, you will either have a rate adjustment or won’t qualify.

HELOC qualifying (and rates) are impacted by how much equity you have in your home, assuming a maxed out HELOC balance. Comparing the examples above of a HELOC which uses 50 percent of your home’s value versus one that uses 90 percent of your home’s value, the former will have a much lower rate than the latter. If you go above 90 percent, you might not find a lender that will qualify you.

Your lender will measure how much you can afford by calculating what percentage of your income is going to housing and non-housing bills each month. Even if a HELOC allows for an interest-only payment (as noted above), the lender will qualify you using a much higher payment to account for the fact that the HELOC has an adjustable rate and could be higher in the future.

Lenders calculate this payment differently, but a common way this “worst case” payment is calculated is with a 20-year fully amortized payment on the max HELOC amount. This will make qualifying harder, and may result in qualifying for less of a HELOC max than you want.

How to Apply for a HELOC

There is not a big difference in how to apply for a home equity line of credit versus how to apply for a traditional mortgage.

First you find a HELOC lender, and they’ll take your application verbally, or will instruct you to fill out a form online. The lender will request government required data which includes the following:

All personal and contact information including name, phone, email, number of children and ages, years of school completed, and ethnicity.
At least two years of residence history and documentation.
At least two years of employment and income history, with all supporting pay stub, W2, and verified tax filing documentation.
At least two months of statements for all bank and investment accounts.
Social security number and written authorization for lender to pull credit report.
Full documentation for life events like divorces, child support, alimony, bankruptcies, etc.
Documentation of payments, insurance, taxes, and income for any properties you own.

All of this might not be required at the first step, but it will be required eventually.

As with any loan, you'll want to shop around to get the best rate and fees. So when a lender gives you a quote for a HELOC, ask them to include information on closing costs, which are usually slightly cheaper than traditional loans, but still can cost in the low-thousands. You can pay these fees in cash at closing or have them added to your HELOC balance — if you do, then you’ll have a payment on your HELOC within the first 30 days of closing, even if you don’t draw on it for any other use.

If you'd like to request HELOC rates, you can quickly find a HELOC lender on Zillow.

HELOCs can also include annual maintenance fees much like credit cards do, and they can have an early closure fee for closing them in the first one to three years. Ask your lender to review this documentation when you first get your quotes.