The Pros and Cons of Using a HELOC for Self-Employed Borrowers

Published May 11, 2022

Getting a HELOC for self-employed individuals is a unique proposition. If you’re self-employed and seeking a line of credit, carefully consider the pros and cons of using your home equity. Knowing how it will help you in the long term is as important as finding short-term solutions. 

To that end, getting a HELOC for self-employed homeowners has its own qualifications. You may need to show:

• Several years’ records of tax returns

• Tax transcripts, or official IRS documents with your income details

• Several weeks’ worth of bank statements

Some homeowners may view HELOC qualifications as straightforward. Still, taking out any loan can have unique requirements. If you’re borrowing money as a self-employed worker, gather all available information before setting your plan in place. If you’re not sure where to start, schedule an appointment with us. We’d be happy to walk you through how a HELOC could help or hurt your financial health.

How a HELOC works

A HELOC functions as a revolving line of credit. This financial product utilizes the equity in your home to supply funding for various projects. While you can technically HELOC for anything, homeowners who seek HELOCs will typically use it for:

• Home expenses or improvement projects

• Debt consolidation

• College fees

• Medical bills

• Compensating inconsistent cash flow

Getting a HELOC is often appealing because you’re only repaying the money that you use, plus interest. You can also use the line of credit outside of the home and withdraw from it as needed during the draw period.

Does a HELOC require income verification?

Prospective HELOC borrowers must meet certain income qualifications. Even when getting a HELOC for self-employed people, there are baseline qualifications. This typically includes:

• Minimum credit score of 620

• Debt-to-income ratio not exceeding 40%

• Consistent record of on-time monthly payments

• Prior ability to repay a line of credit

• Minimum of 15% to 20% home equity

Lenders will primarily look for proof of a steady income. After your draw period ends, you will need to make consistent payments to help rebuild your home’s equity.

You may find that it is more difficult to meet income eligibility requirements if you’re self-employed. Unlike company employees, you cannot submit your W-2 Form or pay stubs. If you’re securing a HELOC for self-employed reasons, you’ll need to gather the necessary tax transcripts and bank statements – even if you have a steady income.

Is using a HELOC while self-employed smart?

For self-employed professionals, HELOCs are generally easier to secure than personal loans. In a HELOC, borrowers offer their homes as collateral. This means a lender can foreclose on your home if you fail to repay the line of credit.

But the question remains: Should you get a HELOC if you’re self-employed? There’s no one-size-fits-all answer for borrowers. If you have a high credit score, getting a HELOC for self-employed needs might make sense. What’s important is that you personally verify your previous record of maintaining a high credit score. You’ll also want to thoroughly review your monthly income and relevant assets.

If you’re newly self-employed or if your income fluctuates, we encourage you to get in touch. Our expert mortgage consultants can carefully look over your finances. We’re also happy to answer any questions that you may have about the best path for you moving forward.

How to use a HELOC if you’re self-employed

Business needs are among the most common ways self-employed professionals use HELOCs. Getting a HELOC for self-employed necessities can vary depending on your business and industry. You may decide to use a HELOC to pay for new equipment and supplies, or perhaps use it for separate expenses.

No matter your reason for seeking a HELOC for self-employed needs, you’ll want capital to meet those goals. Using a HELOC to enhance your business is viable if you can repay the loan. As you prepare for any next steps, consider all the pros and cons of using a HELOC for self-employed purposes.

Pros

• Easier to qualify for HELOCs: Getting a HELOC is typically easier than other financing options because it’s a secured loan. You’ll need specific documents because you are self-employed. However, lenders still regard the loan as less risky.

• Lower interest rates: Spend some time working to improve your credit score. Paying down any debts will help you gain access to the best rates.

• Access to more funds: If you build your home equity, you may be able to borrow more money with a HELOC. You can sometimes borrow up to 85% of your home’s combined loan-to-value ratio.

• More flexibility during repayment period: After your draw period concludes, HELOC for self-employed borrowers enter the repayment period. The period can last 15 to 20 years, and you’ll repay the principal and interest during it.

Cons

• Possibility of defaulting: A lender can foreclose on your home if your business falls on hard times and you cannot repay the loan. Your credit score will also drop, which makes applying for future loans more difficult.

• Variable interest rates: Even if you get a low initial rate, know that it might eventually increase. You will then have to adjust your HELOC repayment plan to a higher borrowing cost.

• Stacking debts is risky: As a homeowner and business owner, you may want to think twice before stacking any debt on top of an existing mortgage or business loan. 

Alternatives to getting a HELOC for self-employed borrowers

Once you have connected with our mortgage consultants, we’ll gladly walk you through other loan possibilities that may match your financial needs. These may include:

• All in One Mortgage: This loan allows homeowners to apply direct deposits to the principal, thus reducing interest payments by tens of thousands of dollars over the life of the loan. The All in One mortgage also functions as a checking account, allowing homeowners to tap into home equity whenever they want with a convenient credit card. This can be a great option for self-employed people whose income does not remain steady throughout the year, as well as for people who are motivated to pay off their mortgages while retaining access to home equity.

• Bank statement refinance: Self-employed professionals can use the loan to verify any income instead of gathering tax returns.

• Home equity loan: Homeowners can apply for a lump sum and gradually repay the interest.

Selecting a loan is a major step for any homeowner. Make sure to consult with an expert so you can settle on a borrowing technique that meets your unique needs.