You have equity in your home so you think you can access it right away. That may not be the case, though. Some lenders and/or programs require a specific amount of seasoning. In other words, you must be in the home for a certain amount of time before you can access the equity. Some lenders also require a specific amount of equity before you can touch it, which is in line with the time requirement as it takes time to build equity.
Just how long do you have to wait? Keep reading to find out.
The Amount of Equity
What lenders really care about is the amount of equity you have in the home. Typically, the magic number is 20%. Most loan programs require you to have 20% of the equity untouched. This gives lenders a cushion should you default on your loan.
This means that you can borrow as much as 80% of the home’s value, leaving 20% of the equity untouched. For example, if your home is worth $250,000, you can borrow up to $200,000. If you have a first mortgage with a balance of $150,000, you could still borrow up to $50,000 in a HELOC.
Most HELOC lenders don’t have a specific amount of time you must wait to take out a HELOC. Some may have the stipulation of six months to a year, but it typically takes at least that long to have enough equity in the home.
If you didn’t make at least a 20% down payment, it will take quite a bit of time to get to the point that you have more equity than the 20% cushion lenders require. At this point, time isn’t an issue, because it takes long enough to build up the equity. Lenders care more about the 20% equity requirement than how long you’ve been in the home.
Other Eligibility Requirements for a HELOC
Seasoning isn’t the only requirement you must meet to get a HELOC. Yes, it’s a big part of it, but having 20% equity in the home isn’t the only requirement. You could have 20% equity and still not qualify for the loan.
Here’s what you need:
- Good credit – Second loans are risky for lenders. If you default on your payments, the first lender gets paid first. Second lienholders only get the money that is left, which oftentimes isn’t enough to pay them off in full. Having a good credit score helps balance out the risk, showing lenders that you’ll make good on your debts.
- Low debts – Lenders also look at your debt-to-income ratio. This compares your gross monthly income to your monthly debts. If your debts take up too much of your income, you pose a high risk of mortgage default. Keeping your debts low helps keep your DTI down, which increases your chances of approval.
- Stable employment – Lenders love to see borrowers with many years at the same job. Even if you changed jobs recently, if it’s within the same industry, it may help. Lenders need stability, knowing that you won’t change jobs often or be out of a job and unable to afford your mortgage payment.
- Assets – While it’s not a requirement, having assets on hand helps your chances of HELOC approval. If lenders know that you have money set aside for an emergency, they’ll feel better about your ability to pay your HELOC even if you lose your job or experience any other type of financial emergency.
HELOCs typically have flexible requirements, but the seasoning isn’t one they let go of very easily. Lenders need to know that there’s room in the home’s value should you experience a foreclosure. Having more than 20% equity in your home and having at least a year between when you bought the home and applied for the HELOC will give you the best chances at securing an approval.