How Does a HELOC Work? Part 2

Steps to Getting a HELOC

Before applying for a HELOC, there are a few things you will want to consider before beginning the process. Make a checklist of the following to-dos to streamline the process and help you save money.

Determine the equity in your home

First, do you have equity in your home? The equity you have in your home is equal to the appraised value of your home minus any first or second mortgage, or any other liens you have on your home.

For example, if you owe $150,000 on your current mortgage and the value of your home is $300,000, then you would have $150,000 in equity.

Current Home Value

$400,000

Loan to Value

85%

=

Maximum Loan Amount

$340,000

Maximum Loan Amount

$340,000

Mortgage Balance

$180,000

=

Line of Credit

$160,000

Document Preparation: Applying for a HELOC is very similar to applying for a mortgage. The lender will provide a checklist of documents required. You can get a jumpstart by gathering the following documents ahead of time.

Proof of Income and Employment: If you are a W-2 employee, you’ll need copies of your last two pay statements. It’s also a good idea to have the last pay statement from the previous year to show bonus or overtime you collected during that year. If you are self-employed, a freelancer, or independent contractor, you’ll need to provide your current profit and loss statements and the previous year’s tax returns.

Assets: Your lender will want to see a list of your assets. Gather the previous 60 days’ worth of all bank statements, retirement account statements and other brokerage accounts you may have.

Debts (Liabilities): Your lender will want to see your current debt payments compared to your income before approving your HELOC application. This is called your debt-to-income ratio.

Additionally, list out your monthly debt payments such as auto loans, student loans, credit cards and other debt payments you make each month. You will also be asked to provide the most current mortgage statement.

Apply for the HELOC

Once you have all your documents gathered, you’re ready to apply for a HELOC. Not all banks or credit unions offer the same rates, discounts, or promotions, so it’s up to you to shop around for the best deal.

You may find a bank or credit union that offers a lower introductory rate; however, it may result in a higher long-term rate.

You can apply for a HELOC using a variety of channels. Applications can be taken over the phone, in person at a branch location or online.

The Waiting Period

After applying for the HELOC, you can expect a waiting period between 30 and 45 days. This provides time for the loan underwriters to work on your application and time to schedule an appraisal for your home.

Loan Closing

The final step to securing a HELOC is when you sign your paperwork and your new line of credit becomes available. Once your HELOC is available, you can start writing checks against your line of credit. Some lenders will also provide you with debit cards that are directly attached to your line of credit.

Check out the other posts in the How Does a HELOC Work? blog series!

Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.