How To Get Approved For A HELOC in 6 Steps
As a Canadian homeowner over time you build up equity in your home that you may need to access at some point. A product like a Home Equity Line of Credit (HELOC) could be a great tool to access that same equity be it for emergencies, to consolidate debts, or even make home improvements. Many financial institutions today offer home equity lines of credit but there are unique guidelines you’ll need to follow to increase your chances of approval. However, getting approved for a HELOC involves understanding what lenders are looking for. Here are six steps to help you get approved for a HELOC.
What Is A HELOC?
A HELOC, or Home Equity Line of Credit, is a flexible credit option that works like your credit card or unsecured line of credit. It lets you borrow against the equity you’ve accumulated in your home at competitive interest rates. Unlike a traditional home equity loan or second mortgage where you receive a lump sum of money, a HELOC gives you a credit limit that you can draw from as needed. You are only obligated to pay interest on the amount you’ve withdrawn. This makes it a flexible option for financing larger expenses, home renovations, consolidating debts and more.
Your Income And How It Affects A HELOC Approval
There’s a common misconception that you don’t need income to get approved for a home equity line of credit(HELOC). In reality, the line of credit is offered by institutions like banks and credit unions, which require verifiable income confirmation. These lenders have guidelines to ensure you have a stable income to make the required monthly payments, as they assess your ability to repay the borrowed amount.
In short, your income plays a crucial role in getting a HELOC. Institutional home equity lenders want to ensure you have a stable and sufficient income to make the required payments. They will review your current job status, employment history and consistency of your income.
Here are a few key points they will consider:
- Stability of Income: Consistent employment history beyond 2 years and a steady job increase your chances of approval.
- Debt-to-Income Ratio: Lenders will assess your debt-to-income ratio (DTI) to ensure you’re not over-leveraged. A lower DTI ratio (ideally below 50%) is favourable.
- Additional Income: Additional sources of income, such as child tax benefits, and secondary employment can also strengthen your application.
The Amount of Equity In Your Home – Calculated
The equity in your home is one of the most important factors for a HELOC approval. To calculate your home equity, deduct the outstanding balance of your mortgage from the current market value of your home.
For example:
- Market Value of Your Home: $700,000
- Remaining Mortgage Balance: $400,000
- Home Equity: $300,000
Lenders typically allow you to borrow up to 65% of your home’s value minus the mortgage balance. In this example, you could potentially access up to $55,000 through a HELOC (65% of $700,000 less the current mortgage balance).
How Your Credit Score Impacts Your Application
Another crucial factor in getting approved for a HELOC is your credit score(s). Although your credit score may not be a deal breaker, the higher your score the better your chances are of getting approved. A credit score reflects your ability to repay debt along with your creditworthiness. Canadian mortgage lenders prefer applicants with good credit scores.
Here’s how your credit score can affect your application:
- Good Credit Score: A score of 680 or higher automatically means better interest rates and increases your chances of approval.
- Fair Credit Score: Credit scores ranging from 620 to 679 might still qualify you for approval, but you could face higher interest rates and more stringent terms.
- Poor Credit Score: A score below 620 does come with a fair bit of roadblocks and challenges. You will need a detailed story of what led up to a decrease in the credit score.
It’s important to maintain or improve your credit score to get the benefit of multiple options. You should focus on reducing any outstanding debts, limit the number of applications for any kind of credit, and pay your bills on time.
The Benefit Of A Mortgage Broker
Collaborating with a knowledgeable mortgage broker can improve your likelihood of getting approved for a HELOC. Brokers have access to a diverse set of home equity lenders other than banks and can assist you in securing the best interest rates and terms.
Here’s how a mortgage broker can assist you:
- Large Lender Network: Brokers have access to a wide network of lenders, expanding your options for securing a HELOC.
- No Minimum Credit Scores: Mortgage brokers can assist borrowers with any credit score unlike the banks or credit unions.
- Faster Turnaround Times: With years of experience, brokers can expedite the application process, giving you faster access to funds.
In conclusion, getting approved for a HELOC involves understanding the factors that lenders consider. By following these six steps and working with your mortgage professional, you can increase your chances of accessing the equity in your home. It’s important to note that while a HELOC can provide a great deal of flexibility; you must use it wisely. LendToday has been arranging HELOC approvals for Canadian homeowners for years, leverage our expertise to guide you through the process.
Depending on the completeness of your information and application, HELOC approvals can take anywhere from 24 to 72 business hours. This often depends on the lender and the details they’ve been provided. Once approved, you can enjoy the flexibility of making minimum monthly payments that are usually interest-only. This can be particularly beneficial if you’re not in a hurry to repay the entire balance, allowing you to manage your cash flow more effectively and use the funds as needed.
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