A HELOC or home equity line of credit is a loan that a homeowner takes with the equity in his home as collateral. HELOC is different from a home equity loan – in this, the borrower gets access to a credit line from which he/she can draw money anytime he/she likes within a given period. HELOC and home equity loan Toronto are offered by many lending institutions in Toronto.In HELOC, the lender allows a maximum draw amount to the borrower, which must be repaid within a specified time period. A repayment date is pre stated, within which the principal balance and interest must be repaid. The borrower will be required to make minimum monthly payments. The term of a HELOC can be five years to more than twenty years. The interest rate charged on such a loan is variable and calculated on the basis of prevailing prime rates. There are certain minimum equity requirements for HELOC that the borrower must qualify for.Good credit ratingThe borrower’s credit rating is an important consideration in a HELOC approval. Lenders will expect homeowners to have a ‘decent’ credit score, anywhere between a ‘good’ to ‘excellent’ score will guarantee the loan being approved. The actual requirements vary from lender to lender, but a solid score with a good history of regular, timely repayments to creditors will seal the deal.Equity in the homeThe minimum equity requirements for HELOC differ based on the bank the borrower approaches. There must be an equity established in the borrower’s home before he can apply for a HELOC. Typically, banks will not lend unless you have more than 20% equity available in the home.Ratio of debt to incomeThe borrower’s debt to income ratio is another factor that the lender will consider before approving a HELOC. Again, the requirement varies between lenders, but generally, a debt to income ratio exceeding forty percent is viewed as undesirable. Ideally sixty percent of the monthly income should be made available for living expenses and savings. This is after deductions towards monthly loan payments, mortgage payments, property taxes and any other form of debt.Borrower’s incomeThe borrower must have a steady source of income to repay the HELOC as well as meet all household expenses comfortably. Some lenders also accept income from different sources though the standard weekly and monthly paychecks are considered ideal for loan approval.DocumentationTo qualify for a HELOC, proper documentation is required, though the paperwork is generally lesser compared to other loans. Loan underwriters will require documented proof of the homeowner’s insurance, proof of income and other relevant information. The extent of documentation varies from lender to lender. If the homeowner’s present mortgage lender is providing the HELOC, then the documentation required will be significantly less as the lender will already have access to most of his client’s information.Most homeowners comfortably meet the minimum equity requirements for HELOC. A home equity line of credit is a good way to use to equity built in the home, but it should not be taken out to pay for unnecessary expenses or splurged on frivolous luxury items. Homeowners should apply for a HELOC or home equity loan Toronto to pay for important expenses like medical expenses, college fees or home improvements.
