How to Get Qualified for a HELOC
Introduction of HELOC
A Home equity line of credit is one of the most popular loans out there. A HELOC is a mortgage that, in many cases, will provide up to 80 percent of your equity amount in your home. The amount of equity that you can borrow against will vary from lender to lender.
A HELOC can be a great tool to use if you are looking to make some significant home improvements. Today we will discuss what do banks and lenders look at when you are applying for a HELOC and how to get qualified for a HELOC.
The Process:
Credit
Generally, the HELOC loan process is very similar to any other loan or mortgage application process. The lenders would be checking your credit, your tax returns, and also your overall financial strength. The first thing that any lender would look at is your credit, what type of credit you have and your credit history.
When it comes to your credit scores, the lenders have a threshold of a minimum credit score based on which they may approve or decline a loan application. If your credit score is above their threshold, they might accept the application and put it further for underwriting.
Though your credit score is the key to acceptance of the application, it is not the only parameter for final loan approval.
Documents
The next thing the lender is going to look at is your tax returns for the last two years and the latest pay-stubs. The reason why lenders want to look at your tax returns and pay-stubs is to make sure that you are making enough money to pay for the loan that you have applied.
The lenders would also like to check your employment history to make sure you have stable employment for the last two years. Apart from your tax returns and pay-stubs, the lenders would also need your W2s and your bank statements. They might also look if you have some assets like stock, bonds, mutual funds, etc.
Lenders would like to have a complete snapshot of your debts and your assets. Usually, lenders would like you to fill what is called a “Financial Statement” which is one or two pages with all the information about your debts and assets.
Appraisals
Appraisal management companies usually do appraisals. They are third party agencies who are affiliated with the lenders. An appraiser will conduct the appraisal of your home.
Based on his findings, he would then get the updated appraised value which would help the lender to determine how much amount you can be approved for based on the current equity.
Underwriting Requirements
Just like any other mortgage application requirement HELOCs also go through underwriting. After you submit all the required documents to the lender, the application is then forwarded to underwriting. Now the underwriter assigned to your application will review your documents in detail.
The underwriter will qualify your loan based on a few factors. The first thing will be to check if you have enough equity to get the HELOC. The second factor would be the loan to value ratio (LTV), which usually limits a maximum of up to 85 percent of the appraised property value.
The next factor to be considered by an underwriter would be the debt to income ratio (DTI), which usually should be less than 45 percent. After that, the underwriter will approve the loan with or without conditions.
If there are any conditions, then the lender will call you to ensure that all the conditions are cleared and then you are good to close.
Closing
Once you get the final approval, the lender will inform and schedule the closing date. On the closing date you and your co-applicant, if applicable, would need to visit the office and get the final documents signed.
Post signing you would get three days to go through the documents to understand the terms of your HELOC. After three days, you would get access to your HELOC. You can access the funds in multiple ways provided by your lender.
Conclusion
Based on the above process, you would be able to access your home equity through HELOC. It is always better to get in touch with your trusted mortgage loan officer to view your options. Getting a HELOC also has a cost associated with it. Hence, you may want to make sure the HELOC that you are planning to get is worth the cost.
References: https://www.compareclosing.com/blog/how-to-get-qualified-for-a-heloc/
