Home equity lines of credit (HELOCs) are an example of secured lines of credit. The lender will open a line of credit depending on the amount of equity that the customer has in their home. The home therefore, serves as collateral.
However, just like other lines of credit, HELOCs can be quite useful if the borrower needs access to money but not all at once.
For example, someone might want to take out a $50,000 HELOC to finance a remodeling project that they plan to do, and pay for, in stages.
A home equity loan, on the other hand, is an example of a closed-end loan. The borrower receives a big sum of money (such as the $50,000 in the example above) in one lump sum.
They have to repay it in installments until it is fully paid off at the expiration of the loan term. Closed-end loans are sometimes what people refer to as installment loans, with mortgages, car loans, and student loans being the most common examples.
On the contrary, aside receiving a lump sum, borrowers can draw funds from the HELOC during a specified “draw period,” usually up to 10 year period.
They have the flexibility to borrow and repay repeatedly within this timeframe. As they repay the principal, the funds become available to borrow again and more.
After the draw period ends, a repayment period begins, during which borrowers can no longer access funds and must start repaying the outstanding balance. The repayment period typically ranges from 10 to 20 years.
How to Access a HELOC
In accessing any loan facility, certain things have to be put into careful consideration. Let me show you a few general steps to take if you want to access a home equity loan facility:
Evaluate your eligibility
Lenders always consider factors such as your current credit score, income, employment history, and the amount of equity you have in your home. Make sure that you meet the requirements set by the lender before you start the process. However, bear in mind that a Bad Credit Score can Affect Your Credit Loan Application badly.
Research and Choose a Suitable Lender
Visit and make enquiries from different financial institutions such as banks, credit unions, or online lenders that offer this service. Do an extensive comparison of their terms, interest rates, fees, and customer reviews to select the one that best suits you.
Apply For Home Equity Loan
As soon as you have made your choice of a lender, you will have to complete a HELOC application form to initiate the process.
This involves providing personal and financial information, including specific details about your home, income, and debts.
The lender may also request documentation such as tax returns, pay stubs, and other property-related documents.
Property Assessment or Appraisal
The lender may require an assessment of your property to ascertain its current market value. They will make arrangements for a professional valuer to visit your home and assess how much it is worth as at the time of application.
Approval of Home Equity Line of Credit
Furthermore, after reviewing your application, financial documents, and property appraisal, the lender will evaluate your creditworthiness and the loan-to-value ratio. If approved, they will specify the maximum credit limit and terms of the HELOC facility you can receive, including the interest rate and repayment period.
Disclosure and Review
Once you accept the terms, the lender will provide you with a Loan Estimate and a document of Closing Disclosure, which clearly outlines the details of the facility, including fees, interest rates, and any other potential changes. Carefully, review these documents and ask questions where necessary and if anything is unclear.
Disbursement of Funds
Once this credit facility is established, you can now have access to funds as needed during the draw period.
However, some lenders provide checks, credit cards, or online transfer options for easy access to the funds. They also closely monitor you to be sure the funds you get is used for the purpose of its application.
Why Home Equity Line of Credit is Rejected
There are several factors that can make a lender decline your application for a Home Equity Line of Credit (HELOC). It could be one of more of the factors in the list below:
- Insufficient equity: Lenders typically require a certain amount of equity in your home to qualify for a HELOC. If the amount of equity you have is below their threshold, they may decline your application. The specific loan-to-value ratio requirements can vary among lenders.
- Low credit score: Your credit score is an important factor in determining your creditworthiness. If your credit score falls below the lender’s acceptable range, it could result in a rejection. Lenders prefer borrowers with a solid credit history and a good credit score, indicating a low risk of default.
- Inadequate income or employment history: Lenders have to assess your income to ensure you have the means to pay back what you owe. If your income is too small or unstable, it might raise concerns about your ability to make timely payments.
- High debt-to-income ratio Lenders evaluate your debt-to-income ratio, which compares your monthly debt obligations to your income. If your debt payments are already high relative to your income, adding a HELOC payment might strain your financial capacity, leading to a rejection.
- Negative financial events: Past bankruptcies, foreclosures, or other negative financial events can affect your application. Lenders may view these events as indicators of higher risk and might be hesitant to approve your HELOC application.
- Property issues: If there are problems with the property you wish to use as collateral, such as significant damage or legal disputes, your application may be rejected. Lenders want to ensure that the property’s value is secure and marketable.
- Inaccurate or incomplete application: Incomplete information in your application can delay the approval process. Ensure that all the information is provided accurately and completely to avoid any unnecessary issues or a rejection.