Minimum Equity Requirements for HELOC

A home equity line of credit or HELOC is a great way to unlock the value of your investment in home. This being a secured line of credit offers you many advantages. The interest rates are more reasonable than those of credit cards. Prepayment penalties are smaller than regular loans or zero. Plus you can withdraw large sums of money when you need them at reasonable terms. These credit lines offer great benefits but are available only when you meet some basic requirements such as the minimum equity requirements for HELOC.

A home equity line of credit is generally offered to borrowers only if they hold a minimum 20% equity in their home. This limit is enforced to ensure that the borrower owns a reasonable amount of home equity such that the lender’s loan is sufficiently safeguarded. In fact, the higher the home equity the borrower has, the better the interest rates he/she will be offered on a HELOC. This minimum equity requirement may vary a little from lending institution to institution, but 20% is a generally accepted norm industry wide.

The credit lines can be opened up to 80% of the equity value owned in the home. The owned home equity is estimated by deducting the mortgage liability from the current market value of the home. The 80% limit is generally followed to lower the risk of the lender against unfavorable real estate market situations or financial condition of the borrower. Some aggressive private lenders may offer credit lines up to 90% or even 100% of the owner’s equity.

Other Requirements for Getting a HELOC

The lenders also run a financial background check on the home owner to assess his/her capability to repay the loan withdrawn from the home equity line of credit. The credit history plays a great role in getting such a credit line approved and in deciding the interest rate that the lender offers. Your debt to income ratio also has a part to play in assessing your risk as a borrower.

The home’s value is appraised to determine the equity value and all owner documents are verified to ascertain ownership and mortgage position on the property. Proof of steady income and ability to repay the loan is also assessed. If you are a self employed person or have an unsteady or fluctuating income, you may have to convince the lender of your ability to repay the loan liability. The lender will also seek documentation regarding previous second mortgages on the property and their repayment history.

All these requirements including the minimum equity requirements for HELOC have been put in place to ensure that the lender and borrower’s risk is minimized. Investment in home is usually a big one and losing such a valuable asset to bad financial planning can have disastrous consequences. If you go for a HELOC, you should make sure that you draw money from this line of credit only for important expenses or expenses whose return on investment is higher than the interest rate of the credit.