Why do banks require justification for a HELOC?
When you apply for a HELOC, the underwriters will ask how you intend to use the funds. However, the draw period for a HELOC typically lasts 10 years. It is foreseeable that someone takes out HELOC to buy a car, pays off the debt by year 3 and in year 4 makes another draw for a different purpose (e.g., a renovation).
Is the borrower required to notify the bank of their intentions for the second draw?
If yes, then is the borrower required to supply documentation?
If no, then why do the banks even bother asking what the buyer intends to do with the funds in the first place?
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Assuming that you're in the United States, I can share my HELOC experiences/anecdotes. I've opened HELOCs on two different primary residences, once with a big bank and another with a credit union. In both cases, the financial institution was interested primarily in two items:
The combined loan to value (CLTV) of my property after opening the HELOC - the bank/credit union effective would have a secured loan (effectively a lien) on my property in the event I did not pay it off. Having a lower CLTV offers lower risk, in the event that property values dip - I was fortunate that my CLTV ratios were under 0.8 (80%) both times.
My personal income - this was used to measure my ability to repay without resorting to collecting via lien (longer and more expensive process)
With these two pieces of information, I was only asked a cursory question regarding purpose of having the HELOC - at the time, I was planning on using each HELOC for emergency source of funds and possible home improvements.
For each HELOC, I was given a set of checks that I could use to withdraw money from my line - no further questions were asked when I used the funds during the draw period.
YMMV, each institution will have its own underwriting rules.
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