Buying a house is a major financial decision and one of the most life-changing choices a person can make. If you already own a home, you can use its equity to buy an investment or take care of big expenses. Having a lump sum of money to pay for closing costs and another house’s down payment will aid in your next loan approval.
If your current home has enough equity, you can take out a home equity line of credit (HELOC) to cover part of your future loan amount, lower interest rates, and much more. Let’s talk about how to get a HELOC to buy a house.
What is a HELOC?
A home equity line of credit allows homeowners to borrow money against the equity in their owner-occupied home. Homeowners can draw a certain amount of funds at any time from a HELOC to pay for large expenses like home improvements, education, debt consolidation, or paying toward a second mortgage.
Essentially, it functions like a credit card. Every HELOC has a credit limit instead of a lump sum. The borrower only pays back what they borrow.
HELOCs have two phases: the draw period and the payback period. The draw period lasts between five to 15 years, then the payback period also lasts between five to 15 years.
- During the draw period, the borrower can borrow up to the HELOC’s credit limit and must make interest-only payments.
- The payback period follows the draw period. During this time, the borrower can’t draw any more funds anymore and must pay back both interest and principal.
How much money can you borrow from a HELOC?
The credit available is different for each situation since it’s typically determined by the difference between the home’s market value and its outstanding mortgage or other liens. However, it typically isn’t more than 85% of the home’s value.
Borrowers should be aware that the interest rates on a HELOC are generally variable, which means they can fluctuate over time based on changes in the market.
So, without further delay, how can you get a convenient line of credit like this for yourself? It just takes a few simple steps.
Step 1: Talk to your lender and see where you stand.
First, you must figure out if it is possible to draw a line of credit from your home. This first step is easy — you just pick up the phone or show up for an appointment. For the quickest results, have all the necessary information available for your lender, which includes:
What’s the current equity in your home?
Take the value of your home and deduct it from the remaining principal you have on your loan. For example, if your home’s valued at $400,000 on the market but you owe $200,000 on the mortgage, then you have around $200,000 in equity. Keep in mind that you should leave 15-20% of your equity untouched.
Who is applying?
Decide if you will apply on your own or need a co-signer. Co signers make it easier to qualify, but it’s also a team project, so make sure you’re signing with someone that you can get along with, who is trustworthy, and can stay on top of their financial obligations.
Do you live in the home you will borrow against?
If so, your lender must know this information. HELOCs are only for owner-occupied homes. If you want to draw a line of credit from an investment property, that’s called an investment line of credit, or ILOC.
What’s your income and homeownership status?
Paystubs and tax documents for household income, mortgage statement, copy of your homeowners insurance policy, plus other requested documentation. It’s best to know what’s required before you arrive to get everything done in one meeting.
Step 2: Qualify for the HELOC.
Every lender has slightly different standards, but most would allow you to draw equity until you own at least 15-20% of your home or have paid down 15-20% of the loan’s principal.
You’ll also need a healthy credit score that is at least in the mid-600s, a debt-to-income ratio that is as low as possible and not higher than 43%, a steady income, and a healthy payment history.
To buy a house, you must also qualify for a second loan to be able to use a HELOC for the down payment. You should mention this need right away while applying for a HELOC to make sure that your lender will be able to qualify you for a second mortgage and a line of credit.
Step 3: Use your loan to pay for your next mortgage’s down payment.
Now that you have your home equity line of credit, the next step would be to buy the new house using your HELOC, like a convenient credit card. Make sure to keep up with your HELOC interest payments and second mortgage payment.
Turning your new home into an investment property is a great way to offset the costs and have someone else pay down the new loan. We can help with that since we are a hybrid brokerage and full-cycle property management company.
Congratulations, you are now the owner of two homes!