A home equity line of credit or HELOC is a form of revolving credit in which the collateral is your home. It is similar to a credit card that homeowners can draw money from whenever they need it, but enjoying much favorable interest rates. A HELOC can affect your credit score either positively or negatively.
Consumers value their home very much, that is why HELOC is typically used for essential items only like medical bills, home improvements and education, and not for regular daily expenses. There are certain qualifications that applicants should satisfy in order to qualify for a HELOC, and credit score is one of them.
In fact, credit rating bears a lot of weight in the underwriting process of a HELOC application. Credit reports must show that the homeowners have a good to excellent credit score, and have made payments to creditors on time, suggesting a pattern of financial stability overall. Every lender has its own minimum credit score requirement, although generally speaking the chances of getting approved is higher with a high credit score.
Your credit score will determine your risk of not being able to pay back the money you have borrowed through the HELOC loan facility. You may not even qualify for a loan if you have an extremely low credit score like below 500. Meanwhile, a credit score of above 700 – which is considered an excellent score – will likely qualify you for the best rates and terms. Only applicants with FICO scores of 620 or higher can qualify for the prime interest rates.
Any borrower that opens a HELOC is essentially accessing his home’s equity. For starters, equity is the difference between the determined value of the property and what is owed against it. The credit limit is calculated by subtracting the balance in your first mortgage by a certain percentage of the home’s appraised value, which is around 75 to 80 percent.
To illustrate, if the appraised of a home is $400,000, it will be multiplied against 80 percent (or in some cases 75 percent), which will fetch $320,000. It will then be subtracted by the balance in the mortgage loan, say $250,000. In sum, the equity of the home is $25,000 and through the HELOC loan facility, the homeowner can borrow up to that amount. In most cases, the HELOC credit line is a lot higher compared to a regular credit card.
[H]aving no credit is almost as bad as having bad credit. Many creditors are unwilling to lend to you if you have no credit history, but you can’t establish a credit history if no one will take a chance on you. This catch-22 can leave you feeling frustrated, but don’t worry. There are ways of […]
[I]f you are working to improve your credit score, you know how difficult it is to see major changes. Your score may go up three or four points and then back down. You may pay off a small credit card and expect to see a new number, but it only improves by 10 points. If […]
[E]ven though you can use credit and debit cards in most of the same places, but that doesn’t mean they are the exact same. There are several differences between the two that you need to be aware of. Fees and Balances A debit card is linked directly with money in your bank account. You can […]
[I]f you have been working to improve your credit so that you can buy a home, you have probably been watching the news reports about credit changes closely. Just a couple of years ago, you couldn’t purchase a home at all with most lenders if your credit score was below 640. With the economy improving, […]
[M]ost people never check their credit score or only check it occasionally. While you see many advocates for regular credit checks or signing up with a credit monitoring program, there are plenty of times when you won’t have to worry about your credit. However, that doesn’t mean you should ignore it completely. Here are the […]
[S]tarting a new business is an exciting but often scary idea. If you have bad credit, you may find it is even more difficult. If you need to fund your new business with inventory or capital, you may discover that getting a loan is almost impossible. However, alternatives are available to help you get the […]
[W]hen you apply for credit or a loan, you may be asked to give permission for the creditor to obtain a copy of your credit report. You may assume that they will also see your credit score. This is not always the case, and it is important to know who can and can’t see your […]