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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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    What is the point of underwriting anything that lasts 10 years if your underwriting status could change between now and then? They're attempting to disqualify people based on specific immediate intentions. If you're going to gut the entire credit line on day 2 to go to vegas, they don't want to loan you anything.
    – quid
    Apr 14, 2017 at 22:16
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    @quid That just seems like an ineffective way to go about it. Let's say someone with excellent credit goes into a bank and applies for a HELOC to buy a car. Three days later he decides he doesn't want a car, but would rather blow it all on the craps table. Correct me if I'm wrong, but wouldn't the unscrupulous borrower not face any repercussions for doing so (aside from having to pay back all the debt)? Shouldn't he be contractually obligated to use the funds to buy a car else face stiff penalties?
    – Elliot B.
    Apr 14, 2017 at 22:25
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    The unscrupulous borrower would not face any repercussions unless the contract does indicate some sort of provision restricting use of the funds (which it probably doesn't) though immediate use of all of the funds for a materially different reason than indicated could constitute fraud if you were to default on the loan shortly after taking it. People are more honest than you would think and the HELOC is secured by the value of the home the bank is really just weeding out the severe obvious risks.
    – quid
    Apr 14, 2017 at 22:42
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    @BrenBarn, the question is why, not whether or not the question on it's own would be an effective means of underwriting. The question is asked to disqualify applicants.
    – quid
    Apr 16, 2017 at 0:25
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    Some banks have restrictions on what a HELOC can be used for. If you intend to use the money for one of their restrictions then they'll reject your application. In theory, I guess it could protect the bank from the investors when they have to write off a bad loan with a HELOC, they'd have an excuse. But in reality, a committee of people sit around a table deciding the rules, because there's not a hard guideline and some contributions are just not really necessary, the only factors that apply are the ability to repay. "Immediate relief" is usually valid, which may even include that Vegas trip.
    – user1442498
    Oct 7, 2017 at 0:09

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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:

  1. 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.
  2. 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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