How Much Can You Borrow With a Home Equity Line of Credit?
The amount that you can borrow on a home equity line of credit depends on the equity you have in your home, your credit score and your monthly income. Each lender uses its own underwriting guidelines, but people lacking equity, income or a satisfactory credit history can borrow little or none.
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Credit Scores
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The first step in a home equity line of credit (HELOC) application involves the loan officer checking the credit score of the applicant. Lenders can obtain credit reports from any one of the three credit reporting bureaus: Equifax, Experian or TransUnion. Credit scores required for HELOCs are higher than for mortgages because HELOCs are not insured by government entities like the Federal Housing Administration of the Department of Veteran's Affairs. Borrowers normally need to have scores of at least 680.
If an application involves two or more borrowers, lenders require each borrower to meet the minimum score requirement and do not average out the scores of the applicants. People with scores above 720 can usually qualify for higher line amounts that those with lower scores.
Monthly Income
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Applicants must have verifiable income to qualify for HELOCs. Lenders require self-employed persons to provide two years of business and personal tax returns that demonstrate a steady income. One-off income generating events like an inheritance or home sale are excluded from the income equation.
Salaried employees must produce two years of W2 forms, although recently hired people can apply if the lender can verify their salary and employment with their current employer. People who receive income in the form of commissions and bonuses must produce at least 12 months of pay slips demonstrating a steady income.
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Debt
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Monthly debt payments such as mortgage payments, automobile loans and credit card payments are deducted from the borrower's gross verifiable monthly income. Lenders normally only approve HELOCs if the projected payments do not cause the applicant's debt-to-income level to exceed 40 or 50 percent. The difference between the applicant's current monthly debt and the maximum debt level allowable with the applicant's credit score represents the maximum monthly payment the borrower can afford.
Equity
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Lenders normally rely on automated valuation models (AVM), also known as electronic home value calculators, to determine the value of a property. AVM calculations are based on data pertaining to recent home sales in the area. If an AVM comes back too low, the lender orders a full home appraisal. Lenders impose maximum loan-to-value limits of between 70 and 90 percent on HELOCs. The lender deducts the amount of any existing mortgage from the property value and the difference between the mortgage and the loan-to-value maximum represents the equity that borrower can tap. The applicant cannot take out a HELOC for the full amount unless the debt-to-income ratio proves that the applicant can afford a payment based on that amount.
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