Applying for a HELOC

How to a Apply for a Heloc - what do you need?

A Home Equity line of credit is a widely used and very popular method of equity release, and there are a wide variety of lenders willing to offer these types of Equity loan if you fit the necessary criteria.  But what are the criteria, and how do you go about getting the process started?  The answers are suprisingly simple you'll be glad to hear.

What are the criteria for approval?

As with any sort of mortgage or home loan, a lender will consider three main things when deciding whether or not to lend to you: your credit score, debt servicing ability (aka Debt to Income ratio) and LTV or Loan to Value ratio.  With equity loans, the LTV is even more important that most home loans, as this is what you are essentially borrowing against.  With a standard mortgage you are borrowing against the value of the whole property, while with a home equity loan or line of credit your borrowing against your EQUITY in the property only.  More on that shortly.

Credit Score

This one is pretty obvious.  Your credit score is a number that reflects your past history with managing credit and is a good measure of how effectively you have met your debt obligations in the past.  Low credit Score indicates a history or missed or late payments, defaults or other negative factors and most lenvers have a minimum "floor" they will accept in terms of credit score when it comes to new loan applications, and this vary's between lenders.  A low credit score will count some lenders out immediately, while others will be willing to look at a lower credit score if other factors are favourable.

Debt to Income Ratio

This is essentially your ability to make the projected repayments based on your current income.  As a rough rule of thumb, your TOTAL loan repayments (including any other loans or mortgages) should not exceed around 30% of your before tax income.  Obviously the higher your income, the higher the amount of repayments you can service.  If you already have a home loan or other debts that have mandatory repayments this will eat into your debt servicing ability for a new loan, so if you are already at or around the 25% mark, you could find the maximum credit limit of your HELOC severely reduced, even if you have a lot of equity.

Equity or Loan to Value (LTV) Ratio

This is a key consideration for Equity release products like the HELOC.  Most lenders will only allow your TOTAL loans secured against the property to come to no more than 80-85% of the total market value of the property.  What this means is that if you have a home worth $100,000 and you have a mortgage of $90,000 secured against it, you won't be able to get an Equity loan in most cases, as your existing debts exceed 85% of the properties value.  Some years ago Helocs were available for upto 90-95% of a properties value, but given falling property values and reduced buoyancy in the housing market in general lenders have become a lot more cautious with how much they are will ing to lend.  This makes sense, as the lender needs to be able to recover the debt if you default on payments, by selling the house.

 

Finding Lenders and Applying for a Heloc

Assuming you meet the necessary lending criteria, it's time to start looking for the right lender for your needs.  There's a lot of ways you can go about getting quotes and applying.  you can approach a lender directly, or emply a mortgage broker to get you a range of options, however this odesn't necessarily mean you'll get the best deal.  In many cases it makes good sense to do some research first yourself and find out who is offering the best terms and rates in your location.  The quickest and easiest way to do this is via an online quoting tool.  Many lenders offer online quotes, and this lets you compare different lenders anonymously and quickly to determine who may be the best option.

 

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Once you've short listed lenders

Once you've got a few quotes from different lenders online it may be worth considering getting a broker to make enquiries on your behalf.  Brokers are sometimes able to arrange better deals than the general public, as they work with lenders closely on a daily basis and often bring them a significant amount of business.  This relationship can help with getting marginal loans "across the line" and approved, or in a range of other ways such as negotiating lower closing costs, interest rates or contributions towards legal costs.

The value of stability

One final factor that a lender will consider is the stability of your employment history.  If you have a long established job that you've been with for a few years, and a stable work history that the lender can trace this will add to your credibility.  It's better to have a stable work history with a more moderate income than a sporadic employment history with higher income.  Given that paying off a Heloc will take time and regular repayments to keep interest charges in check, this makes sense.