Everything veterans should know when applying for a HELOC

Veterans can use home equity. Here's how it works.

If you've served in the military and own a home, a home equity line of credit could be a way to turn your equity into cash you can spend. While the VA offers excellent mortgage benefits, they don’t offer HELOCs. 

What is a HELOC for veterans?

A home equity line of credit (HELOC) is a way for homeowners to borrow against their home equity repeatedly for a few years, rather than taking a one-time loan. The VA doesn’t insure HELOCs like they insure mortgages, so veterans would apply for a HELOC from a private lender like any other borrower. 

Can veterans get a HELOC?

Yes, veterans who qualify can apply for a HELOC through private lenders. Your military service doesn't automatically guarantee approval, nor does it disqualify you. Lenders evaluate HELOC applications from veterans using the same criteria they use for civilian borrowers: home equity, credit score, income, debt-to-income ratio, and property type.

Is there a VA-backed HELOC program?

No, the Department of Veterans Affairs does not offer or guarantee HELOCs. 

The VA provides several mortgage benefits, including VA purchase loans and VA cash-out refinances, but a HELOC isn't among them. If you want to borrow against your home equity with a line of credit, you'll need to work with a private lender offering conventional HELOCs.

The VA does offer a cash-out refinance option, which allows you to replace your existing mortgage with a new, larger VA loan and receive the difference in cash. This is different from a HELOC, which is a second mortgage and doesn't replace your first mortgage.

Can you get a HELOC if you already have a VA loan?

Yes, you can apply for a HELOC even if you currently have a VA loan as your primary mortgage.

The first consideration is your combined loan-to-value ratio (CLTV). This is the total debt against the home compared to its value. If your VA loan balance plus the desired HELOC amount is under what the lender allows, you may qualify. This would be true no matter what kind of mortgage you have.

Here are some scenarios:

A veteran with sufficient equity could have a better chance at approval: If you've paid down some of your VA loan and the new HELOC would still leave you with 20% or more equity, lenders are generally comfortable approving a HELOC. Your strong equity position reduces their risk.

A veteran with high LTV could have a harder time qualifying: If you recently purchased with a VA loan using little or no down payment, you may have insufficient equity. Most lenders require at least 15-20% equity to approve a HELOC, so you might need to wait until you've built more equity through payments or home appreciation.

A veteran consolidating debt could find that a HELOC is a useful tool: If you're considering a HELOC to pay off credit cards or other high-interest debt, you might be able to improve your financial situation. HELOCs typically have lower interest rates than credit cards. Debt consolidation for veterans could help you streamline your finances and create some breathing room in your budget. If you allow the lender to pay off other creditors directly, they’ll usually take the soon-to-be-paid-off debts into consideration when they look at your debt-to-income ratio.

HELOC vs. VA cash-out refinance for veterans

When you need to access your home's equity, you have options. Here's how a HELOC compares to a VA cash-out refinance:

A HELOC might make more sense if you want to preserve your current mortgage rate or need flexible access to funds over time.

A VA cash-out refinance could be better if you qualify for a rate you’re happy with or want to consolidate multiple debts into one payment.

What lenders look for when veterans apply for a HELOC

When you apply for a HELOC, lenders typically evaluate several factors:

Home equity: Most lenders require you to maintain at least 15-20% equity in your home after the HELOC is established. If your home is worth $300,000 and you owe $200,000 on your VA loan, you might qualify for a HELOC of $40,000-$55,000, depending on the lender's maximum CLTV.

Credit score: Many lenders look for credit scores of at least 620-680 for HELOC approval. Veterans with higher scores may access better rates and terms.

Income and debt-to-income ratio: Lenders want to verify that you have stable income and typically prefer your total monthly debt payments (including the new HELOC) to stay below 43% of your gross monthly income.

Property type and occupancy: HELOCs are generally easiest to obtain on primary residences. Investment properties or vacation homes may face stricter requirements or higher rates.

When a HELOC might make sense for veterans

A HELOC can be a useful financial tool in specific situations. That said, you should approach a HELOC (or any loan) cautiously. Most HELOCs carry variable interest rates, which means your payment could increase if rates rise. (A HELOC with a fixed rate gives you more predictability.) You're also using your home as collateral. If you don’t repay the loan, you could lose your home. 

If you’re a veteran in one of these situations, a HELOC could be worth exploring:

Debt consolidation: If you're carrying high-interest credit card debt, using a HELOC to consolidate those balances could lower your interest rate and simplify payments.

Emergency flexibility: A HELOC could provide a financial safety net. If you qualify, you can establish the line of credit. A HELOC allows you to borrow, repay, and borrow more, as often as you like, up to your credit limit, for the first few years. This can be valuable for veterans with variable income or those preparing for a major life transition.

Large planned expenses: If you're planning a significant home renovation, education expenses, or another major cost, a HELOC could be a smart way to cover the expense.