How Does a Stated Income HELOC Work?
A stated income HELOC, (home equity line of credit) uses the equity in your home as collateral for a revolving credit line. Often, HELOCs are issued just like credit cards. The limits tend to be very high, in the tens of thousands of dollars, because the lender has a lien on your property. In the stated income form of HELOC, you do not have to provide proof of income in order to obtain the loan. You simply state your income on an application. Stated income HELOCs are highly flexible with many uses, but they do come with significant drawbacks..
Functions of an HELOC
Most home equity lines are used as tools to build a home's value. For example, many borrowers use the credit lines to purchase raw materials for improvements to the home. The money can be spent on new floors, safety improvements, a new roof or new windows. Some home owners choose to use the money for luxury home purchases like sound systems, pools or spas. As a rule of thumb, it is best to use this type of loan for any improvement that will add value to your house. It is not wise to use the loan, which is secured against your home itself, for purchases such as vacations or televisions. Ultimately, though, you decide how to spend the money.
Benefits of a Stated Income HELOC
Stated income HELOCs are only one form of this loan. Stated income loans are used most by individuals who do not have a stable income, have just started a new job or otherwise cannot prove the income level they want to use in applying. The main benefits of this loan type are the fast approval process, which requires very little paperwork, and the flexibility it offers homeowners to estimate their income. For example, these loans are usually open ended. If you want to list an income you think you will be making in a year from now rather than your current income, you can choose to do so, and perhaps the loan will fit your needs better in the future.
Drawbacks of a Stated Income HELOC
Lenders generally dislike the added risk of a stated income loan. If you are not required to verify your income, you will pay for this luxury. The rates on these loans are higher than their counterpart standard HELOC loans. Further, the limits may be much lower than you expect because lenders rarely use the face value you state as your actual income in factoring your loan limits.
Alternatives to a Stated Income HELOC
Since the credit crisis of 2007, stated income loans of any type are rare. If you want to use the equity in your home for a credit line, you will likely need to go the traditional route and elect a standard home equity loan or HELOC. A home equity loan is an installment loan with fixed payments and a payoff date. An HELOC is a revolving loan, like a credit card, that allows you to pay down the balance on your line in order to regain your limits. Choose the option that makes most sense in your situation.