Can You Get a HELOC With an FHA Loan?

If you currently have an FHA loan and are looking to tap into your home equity, you may be wondering if you can open a home equity line of credit (HELOC) with an FHA mortgage The short answer is yes, you can get a HELOC with an FHA loan, but there are some important requirements and limitations to be aware of

What is a HELOC?

A HELOC is a revolving line of credit that allows homeowners to borrow against the equity they have built up in their home. With a HELOC, you are approved for a set borrowing limit and can draw money as needed up to that limit. HELOCs typically have a 10-15 year draw period where you can access the funds, followed by a repayment period where you pay back the principal plus interest.

HELOCs usually have variable interest rates since they are tied to the prime rate This means your interest rate can fluctuate over the life of the loan HELOC rates are generally lower than credit cards and other financing options which makes them useful for consolidating high-interest debt or financing large expenses.

FHA Loan Refresher

An FHA loan is a popular mortgage program backed by the Federal Housing Administration. These loans require lower down payments and credit scores than conventional loans, making them ideal for first-time and low-to-moderate income homebuyers.

The catch is that FHA loans require you to pay mortgage insurance for the life of the loan This adds to your monthly payment and increases your total costs over the long run FHA loans also have strict guidelines regarding cash-out refinancing and borrowing against your home equity,

HELOC Requirements for FHA Loans

While FHA borrowers can open a HELOC in most cases, there are limitations in place to protect the lender and FHA insurance fund. Some key requirements include:

• You Must Have at Least 10% Equity – FHA requires you to have at least 10% equity in your home to open a HELOC. They do not allow combined loan-to-value ratios over 90%.

• FHA Loan Must Be at Least 1 Year Old – You generally need to wait 12 months after getting an FHA mortgage to open a HELOC. This ensures you have established a solid payment history.

• Mortgage Payments Must Be Current – You cannot have any late mortgage payments in the past 12 months. FHA requires a spotless payment record to approve secondary financing.

• Total Debt Ratios Capped at 43% – Your total debt-to-income ratio including the HELOC payment cannot exceed 43%. FHA is strict about debt loads.

• HELOC Must Be in Second Lien Position – The HELOC must be in second position behind your primary FHA mortgage. You cannot do a first-lien HELOC with an FHA loan.

• No Cash-Out Is Permitted – You can only use FHA HELOC funds for home improvements or debt consolidation. Cash-out refinancing is prohibited.

• Home Value Must Be Supported – In most cases a new appraisal will be required to verify your home value and available equity for the lender.

As long as you meet these requirements, FHA borrowers can utilize a HELOC for access to low-cost financing. Just keep the borrowing limits and guidelines in mind.

Weighing the Pros and Cons of an FHA HELOC

While HELOCs can provide many benefits, they also come with some potential drawbacks to consider carefully before moving forward:

Pros

• Access cash for home renovations, repairs, or consolidating high-interest debt
• Variable rates can start out lower than alternatives like personal loans or credit cards
• Only pay interest on what you actually use, not full credit line
• Opportunity to lock into fixed rate during draw period for rate security
• Typically easier to qualify than cash-out mortgage refinancing
• Draw funds as needed instead of one lump sum

Cons

• Putting your home at risk if payments aren’t made
• Interest rates and payments may increase over time
• Closing costs and fees can be expensive
• Total borrowing costs increase the longer you carry a balance
• Lower borrowing limits than cash-out refinance in most cases
• Mandatory FHA mortgage insurance premium remains in place

As with any major financial decision, it is smart to run the numbers and consider both the pros and cons before moving forward with an FHA HELOC.

Steps to Getting a HELOC With an FHA Loan

If you decide an FHA HELOC alignment with your financial goals and homeownership plans, here is an overview of the process:

1. Review equity and value requirements – Confirm you have at least 10% equity and your home value supports the desired borrowing limit. Check FHA guidelines.

2. Check payment history – Review your FHA loan payment history and confirm you have made all payments on time for the past 12 months.

3. Review credit and income – Order credit reports and confirm your credit score meets requirements. Gather income verification documents.

4. Calculate debt-to-income ratio – Add up monthly debt payments and divide by gross monthly income to find your DTI. Stay below 43%.

5. Research lenders – Compare options from banks, credit unions, and online lenders. Consider fees, rates, and terms.

6. Complete application – Apply with your selected lenders and provide all required documents to be evaluated.

7. Get appraised – If needed, cooperate with appraisal process so lender can confirm home value and equity.

8. Close loan – After approval, review terms, disclose costs, eSign documents. Then fund your HELOC!

The entire process usually takes 2-6 weeks from application to funding. Plan ahead and be thorough with paperwork to ensure quick processing.

Alternative Options to an FHA HELOC

If you have an FHA loan but do not meet the specific HELOC requirements, there are a few alternatives to consider:

• Cash-out mortgage refinance – Refinance into a conventional loan to tap equity. Higher costs but potential for higher LTV.

• Delay HELOC opening – Wait until you have 20% equity or your FHA loan is older before reapplying.

• Personal loan – Unsecured loans have higher rates but do not put your home at risk.

• Home improvement loan – Secured financing for specific projects. Higher rates than HELOCs.

• Credit cards – High rates but an option for smaller borrowing needs. Balance transfer cards can save on interest.

• Home equity loan – Similar to a HELOC but funds come in one lump sum. Easier to qualify.

Each option has pros and cons. Make sure to compare costs and terms across multiple lenders to find the most affordable financing for your situation.

Tips for Managing Your FHA HELOC Responsibly

If you are approved for a HELOC with your FHA loan, be sure to borrow responsibly and within your means. Here are some tips:

• Only use for planned purposes like home improvements. Avoid frivolous spending.

• Make at least the minimum monthly payment every single month. Set payment reminders.

• Try to pay more than the minimum when possible to control your total interest costs.

• Watch for rate adjustments and be prepared if your payment increases.

• Never max out the credit line. Keep utilization below 30% for best rates.

• Have a payoff plan to close the HELOC as soon as feasible. Don’t drag it out.

• Review statements monthly and report errors right away. Monitor your equity.

• Contact your lender immediately if you anticipate having trouble making payments.

Following these tips will help ensure you manage your FHA HELOC properly without putting your home at risk.

The Bottom Line

Tapping into your home equity can provide access to funds for important goals and financial needs. While FHA loans have stricter guidelines for secondary financing like HELOCs, they can still be an option for many borrowers. If you meet the equity, history, and borrowing requirements laid out by FHA, opening a HELOC with your current FHA mortgage can offer more affordable financing than alternatives. Just be sure to shop with multiple lenders, understand the terms completely, and borrow responsibly. With the right preparation and discipline, an FHA HELOC can be an optimal way to unlock funds from your home equity.