Can I Get a HELOC If My House Is for Sale?

A Home Equity Line of Credit (HELOC) functions as a revolving line of credit secured by the equity in a homeowner’s property. This financial tool allows individuals to borrow funds as needed, up to a predetermined limit, much like a credit card. Homeowners often use a HELOC for various significant expenses, such as home improvements, education costs, or medical bills, leveraging their home as collateral. The primary question for many homeowners arises when their property is simultaneously listed for sale, prompting concerns about the feasibility of obtaining such a line of credit.

Lender Perspectives

Financial institutions view a HELOC as a secured loan. Listing a home for sale introduces complexities for lenders. The uncertainty surrounding the sale timeline and the potential for a quick payoff rather than a sustained interest-bearing relationship can increase perceived risk. Lenders understand that a pending sale impacts the long-term security of the loan.

This perspective influences a lender’s willingness to approve a HELOC. The institution might hesitate to issue new credit when the collateral’s ownership is expected to change. Underwriting practices for HELOCs often include evaluating the borrower’s continued occupancy. A home on the market signals a potential short-term loan, which may not align with the lender’s typical long-term investment model for these products.

General HELOC Eligibility Criteria

Qualifying for a HELOC involves meeting several standard requirements. Lenders generally require a solid credit score, often a FICO score of 680 or higher, though some may approve scores as low as 620. A higher credit score, such as 700 or above, usually results in more favorable interest rates and terms. Borrowers also need to demonstrate a stable income and employment history, which lenders verify through documentation like pay stubs and W2s.

Another significant factor is the debt-to-income (DTI) ratio, which represents the percentage of gross monthly income allocated to debt payments. Lenders commonly prefer a DTI ratio below 43%, although some might consider ratios up to 50%. The amount of equity in the home is also a primary consideration; borrowers need to have at least 15% to 20% equity. Lenders typically permit borrowing up to 80% to 85% of the home’s value, considering the combined loan-to-value (CLTV) ratio that includes the existing mortgage and the new HELOC. Some lenders maintain an internal policy against approving HELOCs for properties listed for sale, due to the increased risk.

Handling a HELOC During Home Sale

A HELOC functions as a lien against the property, similar to a primary mortgage. When a home with an active HELOC is sold, the outstanding balance must be paid in full at closing. This payoff occurs directly from the sale proceeds. The closing agent or title company is responsible for facilitating this payment, ensuring all liens are cleared before the seller receives any net proceeds.

Homeowners should communicate with their HELOC lender about the impending sale. Lenders often require a notice period, typically 10 to 15 business days, to prepare payoff statements. While having a HELOC does not prevent a home sale, the balance must be settled to transfer a clear title to the new owner. Some HELOC agreements may include early repayment penalties or termination fees, which would also be deducted from the sale proceeds.

Exploring Other Financing

If obtaining a HELOC proves challenging while a home is listed for sale, several alternative financing options exist for accessing liquidity. Personal loans are one option, though they are unsecured and often carry higher interest rates. Another alternative is a cash-out refinance, which involves replacing the existing mortgage with a new, larger one, allowing the homeowner to receive the difference in cash. This option can reset the mortgage term and loan amount.

Bridge loans can also serve as a short-term solution, specifically designed to bridge the financial gap between selling one property and purchasing another. Additionally, options like seller financing or hard money loans might be considered. These alternatives provide different structures and terms, catering to varying needs when a HELOC is not feasible.