How Credit Optimization Can Help HELOC Programs

If you have equity in your home, you may use it to secure a line of credit or a HELOC to have extra cash when needed. Like your primary mortgage, a home equity line of credit uses your home as collateral, but good credit is an important factor for many reasons.

A HELOC is a revolving line of credit in second lien position. It is similar to a credit card but on a grander scale. Homeowners often use HELOCs for home improvements or major renovations, emergency expenses, and to consolidate high-interest debt.

Like any loan, the better your credit score, the easier it is to qualify. Optimizing your credit can help you borrow more money on the best terms.

What is a HELOC?

A HELOC gives you a single credit line that you can use (and reuse) during the draw period. For most loans, this means ten years. You can withdraw funds from the line immediately or just let them sit there unused until you need them.

You don’t pay interest on the loan unless you withdraw funds. You then pay interest only on the funds withdrawn with the option to make a minimum payment or pay toward your balance. As you repay the principal, you can reuse the funds as needed until the draw period ends.

At the end of the draw period, your loan enters the repayment period. During this time, you cannot withdraw funds and must make the required payment, which includes principal and interest on any outstanding balance.

HELOC vs. Home Equity Loan

As a homeowner, you may have the option to borrow a HELOC or a home equity loan. They sound similar, but they have several key differences.

The largest difference is that a home equity loan isn’t a revolving line of credit. You receive the loan funds once at the closing. The funds are distributed in one lump sum and you cannot withdraw funds from it in the future. If you need more funds, you must reapply for another loan.

Other differences include:

• Interest rates: HELOC interest rates are variable, meaning they change as often as monthly, depending on the market. Home equity loan rates are fixed and remain the same for the entire loan.
• Payments: HELOC payments change based on how much you withdraw and the current HELOC interest rate. Home equity loans have the same payment from the first to the last.
• Use: HELOCs provide more flexibility since you don’t have to withdraw funds immediately. Home equity loans require more planning since you can only use the funds once.

Assessing HELOC Applications

Mortgage lenders look at several factors when you apply for a HELOC, including:

• Credit score: Like your primary mortgage, your credit score plays the largest role in your approval. The better credit you have, the easier it is for mortgage lenders to believe you can afford another loan.
• DTI: Your debt-to-income ratio tells lenders how easily you can make monthly payments. The lower your DTI, the more loan you may qualify to receive.
• LTV: Most lenders allow an LTV of up to 80%, but this includes your first mortgage balance.

While each factor is important, your credit score is integral as it’s the first factor most lenders consider.

The Role of Credit Optimization in the HELOC Application Process

Taking advantage of credit optimization can only help consumers get approved for the HELOC they need. Optimizing a credit score generally means taking the necessary steps to maximize your score.

It’s a dynamic process since there are five key factors that affect your credit score, including:

• Payment history: Your payment history is one of the most important parts of your credit score. Any payments you make more than 30 days past their due date can drastically hurt your credit score.
• Credit utilization: It’s important to use your available credit wisely and avoid using your entire credit line. The more credit you have available compared to your outstanding balances, the better your credit score will be.
• Length of credit history: The longer your credit history is, the better your score may be. A short credit history may not give lenders the full picture of your financial capabilities.
• New credit inquiries: Each time you apply for a new loan or credit card, it shows up as an inquiry on your credit report. The fewer inquiries you have, the better it is for your score.
• Credit mix: Having a good combination of different types of credit can help your credit score increase.

This is just the start of what you can focus on to improve your credit score. The downside is that there isn’t a one-size-fits-all approach to improving your credit. What works for one person might not work for another because it depends on many variables in your credit profile.

Benefits of Credit Optimization for HELOCs

Optimizing your credit score definitely takes a lot of time, effort, and knowledge, but there are many benefits, including:

• Lower interest rates: The better your credit score, the lower the interest rate a lender can offer, and a lower interest rate means a lower monthly payment.
• Larger credit lines: Borrowers with higher credit scores often qualify for larger credit lines while staying within the 80% LTV limit most lenders have. If you have a large project or need a large emergency fund, a higher credit score can help.
• Faster approval: The better your credit is, the less proof lenders need that you are a good risk. With lower documentation requirements, you may be able to close the loan faster.

Strategies to Optimize Credit for a HELOC

So, how do you optimize your credit score for a HELOC? Here are some common strategies that help borrowers:

• Pay down debt: The more debt you have, the riskier you are to lenders. Paying down debt reduces your credit utilization rate and helps increase your credit score. This is especially important for debts that are near the credit limit.
• Make on-time payments: Your payment history affects your credit score the most. If you’ve gotten behind, catching up and making future payments on time is crucial.
• Limit new credit inquiries: Only apply for new credit if you absolutely need it. Don’t fall for the trap of getting new credit cards or personal loans just because you receive a special offer in the mail.
• Correct errors: Consumers get free weekly access to credit reports, making it easy to stay on top of what’s reported. If you see errors, dispute them with the appropriate credit bureau immediately.
• Keep credit accounts open: If you have credit lines you no longer use, keep them open to lengthen your credit age. The longer you have credit, the better it is for your credit score.

Knowing which of the above steps or a combination of them is right for your credit is like putting together a complicated puzzle. There could be many ways to optimize your credit in any given circumstance. Which is where the CreditXpert Platform comes into play – optimizing credit has never been easier or more data-driven.

This is also a good strategy for loan officers who want to help their clients either qualify for better financing terms or turn a denial into an approval. Rather than giving clients basic advice, like paying off debt or making your payments on time, you can use CreditXpert to run thousands data points in seconds, so your clients can see the exact path and likelihood to optimizing their credit.

Final Thoughts

HELOCs are a great way to get your hands on some capital while using your home as collateral. They offer flexible lines of credit, and when you optimize your credit score, can have low interest rates.

The key to achieving your financial goals is learning how to maximize your credit score to get the best rates, terms, and loan amounts on your HELOC.