What You Need to Know About Applying for a HELOC

August 26, 2022 by Partner Colorado Credit Union

If you’re a homeowner in need of extra cash, tapping into your home’s equity can be a great option. A Home Equity Line of Credit (HELOC) allows you to borrow against the equity in your home and use the money for whatever you need, debt consolidation, home renovations, vacations, college expenses or an emergency fund. When it comes to applying for a HELOC, here’s what you need to know about the process.

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home for a specific period of time. The equity of your home is the difference between how much you owe on your mortgage and how much your home is worth. You can use our free home equity calculator to determine the equity of your home.

A HELOC works similar to a credit card. Once you get your HELOC, you can borrow as much or as little as needed during the draw period. Some financial institutions will require a minimum on the initial draw, so be sure to find out what that is. The draw period generally lasts five to 10 years. Once the draw period ends, the borrower has the choice to begin repaying the loan for the remainder of the term, or to refinance with new loan terms. Because a HELOC is backed by a valuable asset (your home), a HELOC is considered a secured debt, which generally has a lower interest rate than an unsecured debt, like a credit card or personal loan. With a HELOC, there may be closing costs you need to pay, be sure to ask about those before proceeding with the loan. However, with a Partner Colorado HELOC, there are typically no closing costs.1 You can also access your funds with our HELOC Visa® with Rewards.

What do you need to qualify for a HELOC?

Requirements for qualifying for a HELOC can differ from lender to lender, but in general these are the factors most lenders will consider when taking a HELOC application.

Debt-to-income ratio

This amount is your total monthly debt payments divided by your gross monthly income. For example, if you earn $5,000 a month and your debt payments are $2,000 a month, your debt-to-income ratio is at 40%. This percentage is used by lenders to gauge how well you could manage to make a monthly HELOC payment. It can vary from lender to lender, but according to Nerd Wallet, lenders will want you to have a debt-to-income ratio of 43% to 50% at most, although some will require even lower.

Percentage of equity

The amount of cash you can borrow depends on the amount of equity in your home. Generally, lenders will allow you to access 80% of the amount of equity you have in your home. However, with a Partner Colorado HELOC you can borrow up to 90%.

Credit score

As with any type of loan, your credit score is one of the main factors on whether or not you qualify for a loan. According to Bankrate, lenders typically require you have a minimum credit score of 640 when applying for a HELOC.

If you’re a homeowner needing some extra cash, applying for a HELOC can be a smart move. And knowing how the process works ahead of time, you’ll be ahead of the game.


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