A home equity line of credit (HELOC) can be a good way to borrow money. It lets you use the value of your home as collateral to get money for things like home repairs, debt consolidation, or big purchases. But it’s important to know how a HELOC will affect your finances, especially your debt-to-income (DTI) ratio, before you apply for one. This complete guide will explain if and how a HELOC affects your DTI so that you can make the best choice.
What is DTI and Why Does It Matter?
Your debt-to-income ratio compares how much you owe each month to how much you earn. It’s calculated by dividing your total monthly debt payments by your gross monthly income.
For example if you have $2500 in monthly debts and earn $6,000 per month, your DTI would be $2,500/$6,000 = 41.6%.
This percentage gives lenders a snapshot of your financial health and repayment capacity The lower your DTI, the more favorably lenders will view you. Most lenders prefer to see a DTI of 43% or less when considering applicants for mortgages, HELOCs, and other loans
Do Lenders Count a HELOC Toward Your DTI?
Yes, lenders will include the potential credit limit of your HELOC when calculating your debt-to-income ratio. This is because a HELOC functions like a credit card—you have access to up to the entire approved credit line.
So lenders will count the full HELOC limit as possible debt you could take on, even if you have no balance. A higher credit limit will have a bigger effect on your ratio.
How Much Could a HELOC Increase Your DTI?
The impact a HELOC has on your DTI depends entirely on the size of the credit line. For example:
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Assuming your HELOC limit is $20,000 and your income is $60,000 a year ($5,000 a month), your DTI would go up by 33% even if you had no money in the account.
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On a $40,000 limit with the same income, your DTI would rise by 67%.
From what you can see, the credit limit has a big effect on your ratio. If you have a moderate household income, even a relatively low HELOC limit of $15,000 could make your DTI go over 2020.
Tips to Minimize the DTI Impact of a HELOC
If you want to move forward with a HELOC but are concerned about DTI, here are some tips to minimize the impact:
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Request a lower credit limit. Opting for a smaller line, like $10,000 vs. $50,000, reduces the influence on your ratio.
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Pay down existing debts. Reducing other monthly payments counteracts the HELOC impact.
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Increase your income. Boosting earnings grows the denominator in the DTI equation.
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Use a co-signer. An applicant with excellent credit/DTI can offset your situation.
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Make additional payments. Paying the HELOC balance down faster lowers utilization.
Careful planning allows you to take advantage of a HELOC’s flexibility while maintaining a healthy DTI.
What’s Considered a Good DTI for a HELOC?
Most lenders like to see your DTI at 43% or below when applying for a HELOC, though some may allow slightly higher ratios. The sweet spot is a DTI of 36% or less. This demonstrates you can easily handle the new HELOC payment.
A higher DTI isn’t an automatic deal-breaker, but you may face stricter requirements or higher interest rates. A strong credit score, significant home equity, and other assets can help offset a higher ratio.
How Else Does a HELOC Impact Your Finances?
Beyond potentially increasing your DTI, opening a HELOC can influence other aspects of your financial situation:
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Interest payments. You’ll owe interest on the outstanding HELOC balance each month.
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Credit utilization. Maxing out your HELOC limit could temporarily lower your credit score.
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Home equity. Drawing substantially on the HELOC decreases how much equity you have left.
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Financial discipline. Having access to funds can lead some borrowers to overspend.
Being mindful of these secondary effects ensures you use the HELOC responsibly.
Alternatives If You Want to Avoid the DTI Impact
If you don’t qualify for a HELOC or want to avoid the DTI influence, here are a few alternatives to consider:
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Cash-out refinance: Pull cash from your home equity while potentially lowering your interest rate.
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401(k) loan: Borrow from your retirement savings temporarily.
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Personal loan: An unsecured installment loan with fixed payments.
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Home equity loan: Similar to a HELOC but with fixed repayment terms.
Each option has its own pros, cons, and qualification requirements to weigh. Speaking with a financial advisor can help determine the best fit.
The Bottom Line: Plan Ahead to Make the HELOC Work for You
Tapping into your home equity with a HELOC can be a smart move—if used wisely. Being aware of all the potential impacts, especially on your DTI ratio, allows you to make the most informed choice.
With careful planning, you can keep your DTI in check while benefiting from the HELOC’s flexible access to funds. Pay close attention to the credit limit and utilize tactics like making additional payments to offset the influence on your ratio.
At the end of the day, a HELOC is simply a tool. Used properly and strategically, it can provide financial freedom. With the right prep work and discipline, you can take advantage of your home equity while maintaining strong finances and a healthy DTI.
Tips for getting a HELOC with a high DTIÂ
- Ask your local credit union: Credit unions are not-for-profit financial organizations. As a result, they tend to have more flexible lending criteria than traditional banks. A credit union may be more willing to work with you despite a high debt-to-income ratioâespecially if you have a long-standing relationship with them.Â
- Prequalify where you can: Shop around and prequalify with multiple lenders. This will give you an idea of your eligibility and the terms you might receive, without impacting your credit score. Its also the best way to compare offers and secure the most promising one.Â
- Improve your credit score: A high credit score can make you a more attractive borrower, even with a higher DTI. Apply extra payments toward debts, make timely payments, and avoid new credit inquiries to increase your score. Consider checking your credit report to review and dispute any errors.Â
- Increase your income: Take on a side hustle or part-time job to boost your monthly cash flow, effectively lowering your debt-to-income ratio. Â
- Consider a cosigner: A trusted cosigner with excellent credit and low DTI can help improve your chances of approval. However, its important to note that the cosigner agrees to take responsibility for the loan if you default.Â
- Wait and pay off debt first: If you have a weaker financial profileâhigh DTI, low credit score, low equityâqualifying for a HELOC may be out of the question. While frustrating, you can become a stronger candidate with just a few months of focusing on debt repayment. Alternatively, if you need money urgently, you can explore alternatives with easier thresholds.Â
Why it can be a good option: No DTI requirementsÂ
Have a major expense to cover, a nest egg to bolster, or simply want to do away with monthly payments? A home equity investment (HEI) allows you to leverage your home wealth for a single lump sum payout. You get cash today, in exchange for a share of your homeâs future appreciation. There are no monthly payments, rather you repay the investment anytime within a flexible 30-year term when you sell the home, refinance, or use another cash reserve.
The process is similar to that of a HELOC; after submitting your application, youâll go through the underwriting process, get a home appraisal, and close.Â
HEI requirements are less stringent than other products, making them a favorable option for borrowers with less-than-great credit or low income. They also benefit mortgage holders looking to access the equity in an investment property.Â
- Loan amount: Up to $500K
- Time to fund: 3 to 8 weeks
- Requirements: 500 credit score or higher, sufficient equity, home in an available location
Prequalify for an HEI without impacting your credit score or committing to applying.Â
Why it can be a good option: Lower DTI requirements
A cash-out refinance replaces your existing mortgage with a larger loan, allowing you to pocket the difference in cash. Since youâre effectively getting into a new mortgage, youâll have a new rate and terms. Unlike a HELOC, a cash-out refinance doesnât add an extra monthly payment.Â
Itâs a great way to lower your interest rate and monthly payments while boosting your cash flowâbut only if you can secure a better rate. When rates are high, a refinance can cost you thousands of dollars over the life of the new loan.Â
- Loan amount: Up to 80% of your home equity
- Time to fund: 6 to 8 weeks
- Requirements: 620 credit score, 20%+ equity, maximum DTI of 40% to 50%Â
Why it can be a good option: Lower DTI requirements
A personal loan provides a lump sum of money repaid in fixed monthly installments over a set term, 1 to 7 years. They are generally unsecured, meaning they donât require collateral. However, you can apply for a secured loan to increase your chances of approval and loan amount or to score a better rate.Â
Loans can be general, or you can work with a lender who offers tailored products, like home improvement or debt consolidation loans.Â
- Loan amount: $1,000 to $100,000
- Time to fund: 2 to 5 business days
- Requirements: Varies by lender; credit score as low as 500 for some lenders, sufficient income, DTI of 36% or less
Why it can be a good option: Not based on creditworthiness
If you have a 401(k) account, its worth exploring whether its a good idea to borrow from yourself. Though experts generally advise against dipping into your future security, there are times when short-term needs justify it.
A 401(k) loan allows you to borrow up to a set percentage of your vested account balance from your retirement savings. Youll repay the loan and interest through payroll deductions over a 5-year term.
Before applying, its best to consult with a financial advisor. Taking from your nest egg without a plan will quickly result in a retirement shortfall.
- Loan amount: Up to 50% of your vested account balance, with a maximum of $50,000.
- Time to fund: Varies by lender; days to weeks
- Requirements: An eligible 401(k) plan
Pro-tip: A 401(k) hardship withdrawal can help you leverage your retirement account in cases of financial hardship. You wont be on the hook for repayment. However, they deserve the same caution as 401(k) loans, if not more, as youre not responsible for replacing the money in your account.Â
Honorable mention: DTI requirements are similarÂ
Another way to tap into your equity for a single lump sum payout is with a home equity loan. HELOCs and home equity loans have very similar requirements, so while it will also be challenging to get a home equity loan with a high DTI, its not impossible.Â
Home equity loans offer a repayment period of 5 to 30 years, during which youll be responsible for fixed monthly payments. Interest rates are as competitive as HELOCs.Â
Shopping around to prequalify for a home equity loan may increase your chances of securing the financing you need and may even get you a better rate than a HELOC with a high DTI.Â
- Loan amount: Up to 85% of your home equity
- Time to fund: 2 to 4 weeks
- Requirements: 620 minimum credit score, sufficient equity, sufficient income, DTI of 43% or lowerÂ
How a HELOC works
A home equity line of credit (HELOC) is a loan secured by the equity in your home. Using your property as collateral, you can tap into your equity for a revolving line of credit that works similarly to a credit card. Lenders typically allow you to borrow up to 85% of your homeâs equity, but your financial profile can impact this.Â
You can draw funds as you needâup to a set limitâduring the draw period, 5 to 10 years. During this time, youll be responsible for interest-only payments. Once the repayment period begins, your balance will be converted into a principal plus interest loan. Then, youll be on the hook for monthly payments over a 10 to 20-year repayment term. HELOCs have variable interest rates, meaning monthly payments may fluctuate.Â
HELOCs offer a great deal of flexibilityâyou can tackle unexpected expenses or handle ongoing costs as you need, and will only ever pay interest on what you borrow. However, feeling confident about repaying the loan when the time comes is critical. If you default on a HELOC, you could lose your home. Â
To qualify for a HELOC, youll generally need:
- Good to excellent credit: Typically 620 or higher.
- Sufficient equity: You must own 15% to 20% of your homeâs equity.
- Sufficient income: This varies by lender. Generally, youâll need verifiable and stable incomeâwhether from traditional work, self-employment, or an alternative source like disability benefits.Â
- Low DTI: A DTI ratio below 43% is preferred.
How Does A HELOC Affect Debt To Income Ratio? – CreditGuide360.com
FAQ
Does a HELOC affect debt to income ratio?
As you draw from the account, a HELOC affects your debt-to-income (DTI) ratio. However, if you haven’t tapped into your HELOC and the balance is $0, your HELOC will not likely affect your DTI ratio.
What is too high for a HELOC DTI?
Most HELOC lenders prefer a DTI ratio of 43% or lower, meaning your total monthly debt payments shouldn’t exceed 43% of your gross monthly income. But high credit card debt can push your DTI ratio above this threshold, making approval more difficult.
Is a HELOC considered bad debt?
While a HELOC isn’t inherently “bad debt,” its risks—especially for debt consolidation—may outweigh its benefits.May 2, 2025
What payments should not be included in the debt to income ratio?
Exclude the following from your DTI ratio calculation:Utilities (water, garbage, electricity, gas)Car insurance. Cable and cell phone bills. Health insurance. Groceries and entertainment expenses.