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How to Easily Qualify for a HELOC in Canada

How to Easily Qualify for a HELOC in Canada

A home equity line of credit, or a HELOC, is one of the most convenient ways to borrow money and take advantage of the equity you have built over the years. As opposed to a conventional loan, HELOCs offer other advantages such as:

  • Access to large amounts of money whenever you need it.
  • Similar to credit cards in that they are both revolving loans. However, the interest rates for HELOC are not as steep.
  • No penalties for prepayment in HELOCs.

Simply provide all the basic requirements, and you’re a step ahead to getting a HELOC with all these benefits and more. This article will help you decide whether taking out a HELOC is the right choice for you. It will also cover the requirements you’ll need to take note of when applying for a HELOC.

Before we dive into the details, we first determine whether a HELOC fits your financial needs.

Do I need a HELOC?

A HELOC offers many dynamic benefits for the borrower, as previously discussed. However, keep in mind that impulsively applying for a HELOC may prove more problematic than helpful. There are many things to consider before deciding that HELOC is the best option for you.

One of them is whether the credit line is meant for a long-term investment or a more temporary fix. Some people take out a HELOC for the sole purpose of consolidating debts, which is an example of a temporary fix. While this may seem like a good idea, reassess your situation. If you still find yourself financially unstable after the debt consolidation, then you will only incur more debt in the long run.

On the other hand, using a HELOC for a long-term investment such as a home renovation or improvement can increase the value of your home. Another practical use for a HELOC is investing it in a business idea. You can also invest in your own education. Both examples can eventually increase your income.

What are the requirements for a HELOC?

Minimum Equity

As a rule of thumb, a HELOC is only offered to people with a 20% minimum equity on their homes. Urban city homeowners can have as much as 25%. Rural areas can have more as long as they qualify. Keep in mind though that HELOCs aren’t usually available for farms or other special types of properties.

The minimum equity requirement is strictly enforced as a guarantee to the lender. It assures them that the person applying for a HELOC owns enough of their equity. This requirement may vary from one lending institution to the other, but the industry-wide minimum is at 20%. If the borrower has higher home equity, they can get better interest rates.

The law states that you as a homeowner have access to 80% of your current home equity. This means you can borrow an amount equivalent to 80% of the total value of your home. This 80% limit is set to safeguard the lender against any unfavourable circumstances. These could range from the borrower’s possibly uncertain financial situation or the fluctuations in the real estate market.

Background Check

As with any loan, the lenders will run a background check on the financial standing of the borrower to assess their capability to pay it off. The borrower’s credit history will play a major role in the approval of the loan. It is also a deciding factor in the interest rate.

The borrower must be able to prove that they have a steady income. In addition, they must prove that their debt-to-income ratio is enough to ensure that they can meet the repayments for the HELOC.

Current Home’s Value

Home appraisal lets the lender to verify the borrower’s home’s current equity value. Make sure that all your homeowner documents are available during the application process for a smoother experience. The lender may also require documents involving second mortgages on the subject property and receipts for the repayment history.

It pays to be practical when it comes to the funds you can gain from a HELOC. However, if you’re still unsure about how one could benefit you, no need to worry. You can have someone else determine whether this potential opportunity is the right choice.

Many people consult with a HELOC specialist before they apply, just for additional guidance along the way. A professional will be able to inform you of your options, and how best to prepare. This also lets you be 100% sure that this is the best option for you and your specific needs.