How To Purchase A New Home Using A 1st Lien HELOC

Updated March 21, 2021 |

Worth to keep in mind

Your credit score is a significant factor in any investment. The definition of a “good” credit score varies from lender to lender. However, scores in the high 680s-700s are a standard benchmark for borrowers looking to buy a house.

Raising your credit score before applying for a first lien HELOC may increase your chances of pre-approval.

Purchasing a primary residence is an exciting investment, but it takes some smart financial steps to get there. If you’re wondering how to buy a house, you’re not alone in looking for ways to finance your purchase. In fact, 87% of homebuyers financed the purchase of their house in 2020. Using a first lien HELOC can help you manage the financial commitment. First, you’ll need to get approved. Here’s what the process looks like and what you can do to get started.

The Approval Process to Buy a House

If you’re wondering how to buy a home with a first lien HELOC, it all starts with your home equity. A first lien HELOC offers flexible borrowing ability similar to a credit card. Both have credit limits, but a HELOC is based on how much your home is worth, or home equity. The amount also depends on each lender. Typically, lenders grant up to 80% of a borrower’s home equity. After determining your home equity, other factors based on this value should be determined. These include your loan-to-value ratio, credit score, and debt-to-income-ratio.

Purchasing a Primary Residence with Home Equity

  • Borrowers with at least 20% equity in their homes are typically considered eligible for loans. This is an important value in the loan pre-approval process.
  • To determine your home equity value, your local realtor can evaluate your property in an appraisal.
  • A real estate agent can calculate your home equity by finding its current market value. Then, they’ll subtract any outstanding loan amounts from it.
  • These outstanding loan amounts include your current mortgage and any other loans supporting it.

Loan-to-value Ratio

  • Although your realtor calculates the appraised value, it may differ from the real estate purchase price.
  • That’s why lenders compare these two values, which produces the loan-to-value ratio. Dividing the loan balance by the appraised value shows you an exact comparison.
  • Loan-to-value ratios can be helpful both for lenders and borrowers because it calculates the loan risk. The more equity you have, the less risk you’ll carry.

Debt-to-income Ratio

Lenders also calculate your debt-to-income (DTI) ratio, which also estimates your borrowing risk. It also shows how much borrowers can manage along with their other outstanding loans.
As a rule of thumb, a post it’s good to keep your debt-to-income ratio under 36%. High mortgages that occupy 28% of your debt can also skew this ratio.

Besides your home loans, your debt-to-income ratio includes overall loans. These loans may be credit cards, auto, insurance, and student loans. Your overall debt also includes other forms of debt besides loans such as alimony or child support.

Purchasing a Primary Residence with a First-lien HELOC

If you need to raise your credit score, make sure to borrow in proportion to your credit limit. According to the Consumer Financial Protection Bureau, you should borrow no more than 30% of your total credit limit.

Credit scores are composed of overall debt payment history, the length of that history, and outstanding debt. This means that making timely and consistent payments can help you maintain a positive score.

Achieve Financial Freedom

Sign up on to get connected with a licensed lender who can deliver an all-in-one 1st Lien HELOC. They’ll walk you through the application process and help outline your budget, your numbers, and exactly how much you can save by replacing your mortgage.