HELOC hiccups: 7 things to watch for when you apply

Homeowners have built up a lot of equity in their homes over the last few years. If you're sitting on some equity too, you might be ready to tap into it with a home equity line of credit (HELOC). Whether you're hoping to fund a home renovation project, consolidate debt or pay for a child's college education, a HELOC can offer a convenient solution to the right type of borrower. 

However, it's important to be vigilant when you apply for a HELOC and understand what the HELOC application process entails. It might be more involved than you think, and a misstep can prolong the process or reduce your chances of approval.

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HELOC hiccups: 7 things to watch for when you apply

Here are some of the most common HELOC application mistakes to watch out for, experts say.

1. Underestimating the lending standards

The HELOC application process was relatively simple before the 2008 housing collapse, but many banks have since tightened lending standards. So, having unrealistic expectations of what the HELOC borrowing process entails can cause homeowners issues, warns Angie Zuniga, home equity loan officer at First Tech Federal Credit Union. 

"These days, it's similar to the mortgage process, where not only is the available home equity evaluated, but the borrower's credit history and debt-to-income ratio are also reviewed," says Zuniga. 

The process takes two to six weeks on average, with quick HELOC approval often depending on how prepared the applicant is.

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2. Not knowing your full financial standing

Knowing where you stand financially can help you increase your odds of approval and qualify for good HELOC rates. This starts with checking your credit score and pulling your credit reports. Review your credit report for inaccuracies, and consider paying off any debt to improve your credit score and lower your debt-to-income (DTI) ratio.

"A credit report doesn't always tell the full story," says Matthew Sanford, AVP of mortgage lending at Skyla Federal Credit Union. 

Sanford recommends applicants also learn their equity position and how much they could realistically afford to borrow. 

"When it comes to HELOCs, I can't stress this enough: Only borrow what you need," Sanford says. 

Not only can borrowing too much put a strain on your finances when unexpected expenses arise, but HELOC applications for smaller lines of credit are usually processed faster.

3. Not having the necessary documentation 

"Borrowers can save themselves time and frustration by having income verification documentation, a copy of their homeowners insurance and a recent mortgage statement ready at the time they submit their application," says Sanford. 

While requirements vary by lender, you'll likely need to provide documentation similar to when you last got a mortgage on your property. Depending on your situation, you may be asked for the following documents:

• W-2s and/or 1099s
• Recent pay stubs
• Federal tax returns
• Bank statements
• Investment account statements
• Proof of other income (e.g., Social Security, pension, disability, alimony or child support)
• Proof of home ownership
• Homeowners insurance
• Recent mortgage statements

4. Ignoring title issues

Once you've applied and submitted your documents, the loan officer will conduct a title search to ensure you're the primary homeowner. 

"Outstanding issues with titles, such as outstanding real estate taxes, property liens that weren't properly satisfied, or even liens created by down payment assistance programs could create headaches during the HELOC process," Sanford says. 

These items will need to be addressed before a lender can move forward with your application. Make sure previous liens are cleared, unpaid debts are resolved and any previous HELOC accounts are closed, even if the HELOC was paid off or never used.

5. Not responding to lender communication

Even applicants with all the proper documentation and a pristine credit history may have to answer questions and provide additional information. Once you submit your initial application, be ready to field calls or emails from your loan officer.

Zuniga has one piece of advice to keep your application moving forward: "Be responsive. Provide the requested documents and answer questions quickly." 

If you applied online, know how to log back in and access your application so you can provide additional information and upload more documents as needed.

6. Taking on any new debt

If you're thinking about applying for additional loans or other credit during the HELOC application process, Zuniga warns against doing so, as it can delay your application and impact your ability to qualify.

"With any new debts, we will request proof of the lender, loan amount, monthly payment, etc., which means additional paperwork and possibly another underwriting review," Zuniga says. "If the new debt affects the [debt-to-income ratio] too much and it goes over the maximum percentage cap, it could affect the HELOC limit we will lend, or if the DTI is high enough, it could possibly stop the HELOC from being approved."

7. Not understanding the appraisal process

You typically need an appraisal to get a HELOC, but it's become common in recent years for lenders to skip the home visits and do online appraisals instead, which use automated valuation models (AVMs) to analyze data and estimate the value of your home. Often marketed as a no-appraisal HELOC, this process can be faster — but that doesn't always mean better.

An accurate appraisal of your property is crucial to determine how much you can reasonably borrow. Online appraisals don't factor in the interior of your home, so if you've done extensive renovations, you may be able to get more money with an in-person appraisal. That said, if you're looking for a smaller line of credit and have a strong credit score, opting for a lender that does online appraisals can be more convenient.

The bottom line

Many HELOC application problems can be avoided by gaining a full understanding of your finances, thoroughly researching application requirements and preparing all the necessary documents before applying. Unexpected issues may still arise, but you can help prevent delays by responding to inquiries from your lender in a timely manner.

Sanford recommends shopping around before you apply for a HELOC to find a lender that meets your needs. Look for the best HELOC rates you can qualify for, and pay attention to hidden fees like closing costs, prepayment penalties and annual service fees. Lastly, don't be afraid to ask HELOC lenders questions about their application process and how long it normally takes.