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A 66-year-old and a 68-year-old, both retired and living on a combined $4,400 a month in Social Security and a small pension, wanted to help their daughter cover legal fees and a security deposit on a new apartment as she went through a divorce. They estimated they needed $35,000 and assumed their paid-off $520,000 home would make that easy. Their bank denied the HELOC, saying their fixed income did not support the requested credit line once existing expenses were factored in.
Both had excellent credit and no mortgage. The denial had nothing to do with their history of paying bills on time and everything to do with how a lender calculates debt-to-income ratio for a new obligation layered on top of a fixed retirement income.
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A lender reviewing a HELOC application for retirees combines all household income, including Social Security and pension payments, and compares it against the estimated monthly payment on the new credit line. The Consumer Financial Protection Bureau explains that HELOC lenders base both approval and credit limit on the borrower's ability to repay, which includes existing debts and monthly obligations, not simply the home's appraised value.
Even a $4,400 monthly household income, which comfortably covers day-to-day retirement expenses, may not leave enough room in a lender's formula once property taxes, insurance, and a new $35,000 credit line payment are added in. The equity in the home was never in question. The math around ongoing income was.
A home equity investment does not factor income or debt-to-income ratio into its approval process at all, because it isn't structured as a monthly obligation. Point, a company offering this product, provides an upfront lump sum in exchange for a share of the home's future value, with repayment settled in one transaction later, whenever the couple sells, refinances, or buys back the position, within as long as 30 years.
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For a couple living on a fixed income who did not want to risk their monthly budget to help their daughter, avoiding a new payment obligation mattered as much as getting the cash itself.
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