In order to qualify for a HELOC you’ll need to meet certain qualifications. Lenders are looking for applicants with low debt-to-income ratios, solid employment histories, and other indicators of financial stability. This article will show you what it takes to qualify for a HELOC.
Completing the HELOC Application Process
The HELOC application process is not as time-consuming as a traditional mortgage application. However, there is still a bit of paperwork to complete. You’ll need to fill out forms with the following information: your name and other personal information, the name and number of your current employer, your monthly income, and your debts.
You will need to provide documentation proving your current employment (generally a paystub and two years of W-2 forms). Your employer will receive a phone call verifying that you work where you specified. The lender will also send a professional to appraise your home – you must to be available during the specified time to unlock the residence.
HELOC Underwriter Checklist – What Lenders Want from You
The underwriter is the person who reads over your HELOC paperwork and decides whether or not to award you a loan. You cannot talk to the underwriter directly. However, your mortgage broker can answer any questions you have about your qualifications and the application requirements. In general, HELOC writers are looking for four benchmarks:
- Significant equity in the first mortgage. The underwriter will compare your home’s current appraisal with the amount of money you owe on your first mortgage. Since the credit limit is based on the amount of equity in the property, most underwriters want borrowers to have at least 80% loan-to-value on their home (i.e. you have either paid off 20% of your mortgage or your home’s value has increased 20% since the time of purchase).
- Low debt-to-income ratio. To make sure you will be able to afford the payments on your HELOC, the underwriter will compare your monthly debts to your monthly income. When you add your mortgage payment, potential HELOC payment, loan interest payment, property taxes, homeowner’s insurance, and mortgage insurance, the monthly total should not be more than 28% of your pre-tax income. When you add all these housing-related expenses to your other financial obligations (such as credit card payments, car loans, student loans, child support, and alimony), the total should not be more than 36%.
- High credit score. Your credit score will be used to determine whether or not you are at risk for not paying back money borrowed through a HELOC. If you have an extremely low score (below 500), you may not qualify for the loan. If you have an excellent credit score (above 700), you should qualify for the best rates and terms. To qualify for the prime interest rate, you should have a credit score of 620 or higher.
- Solid employment history. The underwriter wants to make sure you will continue to be employed through the life of the loan. He will look over your W-2 forms, double-check your pay stub, and will verify your current employment. If you have been employed in your industry for less than 2 years, you may be asked to provide additional employment information.
How High Will Your HELOC Credit Limit Be?
Because HELOC loans use property as collateral, your credit limit will be determined by the equity in your home. The limit is set by subtracting the balance you owe on your first mortgage by a percentage of the appraised value of your home (generally about 80%).
For example: One couple purchased their home for $300,000 and now owes $250,000. Their home was recently appraised at $400,000. If their lender uses a standard 80% guideline the couple will receive a credit line of $70,000. ($400,000 x .8 = $320,000 – $250,000 = $70,000). As you can see from the example, most people receive a HELOC credit line with a limit much higher than the average credit card.
HELOC Fees: Application Fees and Other Costs
Many lenders will give you a HELOC with no upfront cost. If they do charge an application fee, make sure that it is refundable at the close of the loan. It is common for lenders to charge a HELOC cancellation fee of several hundred dollars if the line is closed early. You may want to ask for this fee to be waived – especially if you plan on moving or refinancing the loan.
Can’t Qualify for a HELOC?
Keep in mind that the above qualifications are only guidelines. You may still be able to take out a HELOC, even if you do not meet the qualifications to a “T.”
Check with your lender. Even if you cannot qualify for a traditional HELOC, you may be able to take out a no-income-no-asset or hard money home equity loan.
Debt-to-income ratio – The amount of recurring monthly debt a person has in relation to their monthly income.
Underwriter – The mortgage professional that reads over loan applications, checks documentation, and makes the final loan award decision.