When Can I Take Out an Equity Line of Credit If My House Is Paid Off?
You can establish a home equity line of credit (HELOC) at any time if you currently have no mortgages on your home. Rules in some states, including Texas, mean that you cannot refinance your existing equity line or loan for 12 months, but if you have no loans on your home, you are free to tap your equity at any time.
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Lien Position
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People often think of home equity lines as second mortgages because many people establish these lines in the second lien position on their home behind their first mortgage. However, if you have no existing mortgage debt, the HELOC occupies first lien position on your home. Any subsequent mortgages you open are subordinate to the HELOC which means if you go into foreclosure, your equity line lender receives full payment before any other lien holders can make claims on the foreclosure sale proceeds.
Application
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When you submit a HELOC application, it can take more than 30 days for your lender to process. In order to price your home, the lender usually orders a full appraisal and it takes about two weeks from the time the lender places the order for the appraiser to inspect your home and complete the report. If you are applying for a small line amount, your lender may opt to use an automated valuation model (AVM) to price your home. AVMs are computer based appraisal systems that value your house based on recent sales. AVM appraisals take just a few seconds and can greatly reduce the processing time of your loan.
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Income
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In order to qualify for a HELOC, you must have equity in your home, but even if you own your home free and clear you must have sufficient income in order to qualify for a loan. The lender uses a measurement called your debt to income ratio to determine the percentage of your income that goes to debt payments. Lenders include your homeowner's insurance, property tax and credit related debt in the debt to income ratio and compare those debts with your verifiable income. Typically, you cannot qualify for a HELOC if your debt to income ratio exceeds 45 or 50 percent.
Insurance
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Homeowners who own their properties free and clear are not legally required to obtain homeowner's insurance. However, a lender cannot approve you for a HELOC or any other mortgage unless you first obtain homeowner's insurance. If you fail to maintain the insurance, your lender must buy insurance, at a premium, on your behalf. Additionally, if you live in an area designated as a flood zone by the Federal Emergency Management Agency, you must also obtain flood insurance before you can obtain a HELOC.
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