Since the equity serves as collateral on the loan, equity must be established in the home before a HELOC can be considered. The minimum equity requirement varies by bank. However, banks generally will not loan more than 80 percent of the available equity on the home. Furthermore, most HELOC lenders will not position themselves behind a second mortgage unless the HELOC will be used to pay off that second mortgage.
The credit rating is a strong consideration in the underwriting process of a HELOC application. For the most part, homeowners are required to have a stable, good to excellent credit score with reports showing regular, on-time payments to creditors. Though the actual credit score requirement varies by lender, a high credit score provides a higher chance of approval. Prime interest rates become available for scores that rest at 620 or higher.
Debt to Income Ratio
The debt to income ratio is also a very important consideration for HELOC qualification. Though the actual ratio requirement varies by lender, the debt to income ratio should never exceed 40 percent. This means, that after totaling the monthly household expenses, mortgage payments, property taxes and loan payments, 60 percent of the household’s monthly income should still be available for savings and living expenses.
Reliable income is required for a HELOC. Homeowners must be able to show that they are capable of repaying the line of credit, as well as the other monthly expenses of the household. Though the standard weekly, bi-weekly and monthly paychecks are ideal for a loan, lenders do accept other types of income.
Documentation is required for HELOC qualification, although the amount of documentation may be less than other loans. Underwriters of the loan will require documented proof of income, homeowner’s insurance and other specified information. The overall documentation requirements will also vary by lender. Generally, a HELOC application that is obtained through the current mortgage lender will require less documentation, since the lender already has access to much of the homeowner’s information.