Requirements for a home equity loan or line of credit (HELOC)

Your home is more than a place to live. It might be one of the most powerful financial tools you have. If you’ve been building equity over the years, a home equity loan or HELOC could help you put that value to work, funding the things that matter most.

Lenders evaluate several factors when reviewing your application for a home equity loan, including how much equity you have, your credit history and score, your debt-to-income ratio, and your income stability. 

Exact home equity loan requirements vary by lender, but most of them follow similar guidelines for both home equity loans and home equity lines of credit (HELOCs). Prepare to apply by reviewing the home equity loan and HELOC requirements ahead of time.

Requirements for a home equity loan or HELOC

Home equity loan requirements and HELOC qualifications can vary based on the terms and lender. Each lender sets its own thresholds, but most evaluate the same core areas. 

Home equity

Your home equity is the portion of your home that you own free and clear. You calculate it by taking your home’s current market value minus the balance left on your mortgage (and any second mortgages). To borrow against it, you need enough equity built up to satisfy your lender.

There is a catch, though: Lenders won’t let you borrow against every dollar of equity. They cap how much of your home’s value you can borrow against, usually leaving at least 15% to 20% of your equity untouched. 

In other words, if you have 20% equity and your lender’s limit means you need to keep 20% in place, you might not have enough equity to borrow against.

Credit history and score

Both your credit score and overall credit history play a big role in home equity loan and HELOC qualifications. Your credit score is a snapshot of how you’ve handled borrowing in the past, and lenders use it to gauge how risky it is to lend to you. 

Minimum credit score requirements vary quite a bit from lender to lender, but most want a FICO credit score of 600 or higher. 

Home equity loans could have more flexible credit requirements than unsecured loans because your home is the collateral, or security, for the loan. If you fail to repay the loan, the lender could foreclose your home to recoup its losses. This reduces the lender’s risk but increases yours.

Debt-to-income ratio (DTI)

Your debt-to-income ratio measures your total monthly debt payments, including the new home equity loan, against your gross (pre-tax) monthly income. It’s designed to give a rough idea of how affordable your debt is. A low DTI generally indicates your debt is manageable and shows lenders you’re more likely to be able to afford your bills..

Maximum DTI limits vary by lender. Most lenders want home equity loan applicants to have a DTI below 43%, and some may require a DTI below 36% for larger loans or lower rates.

Let's say your gross income is $7,000 per month. The total debt you pay each month toward housing, credit cards, loans, and other debts (like child support or alimony) adds up to $2,800.

By dividing your debts by your gross monthly income, a lender can calculate your DTI at 40%:

• $2,800 / $7,000 = 0.40 

• 0.40 x 100 = 40%

If your DTI is higher than you’d like, you have two levers to pull: You could increase your income or reduce your existing debt. A debt-to-income calculator could show you where you stand right now.

Income and employment history

Lenders want to know that your income is steady enough to handle the new payment. About two years of regular employment helps show your income is reliable, but it’s not the only thing that counts. Pay stubs, W-2s, tax returns, or proof of other income (like Social Security, alimony, or investment income) could all do the job.

Property appraisal

Many lenders require a professional valuation to confirm your home's current market value, which an appraiser can provide. The valuation determines how much equity you have and your maximum borrowing capacity. 

You might not need an in-person appraisal to qualify for a HELOC or home equity loan. Many home equity lenders use desktop appraisals or automated valuation model software to determine the current fair market value of your home without an in-person visit.

How lenders calculate home equity

Lenders calculate your home equity by taking your home’s current market value and subtracting what you owe on your mortgage. For example, if your home is worth $500,000 and you owe $300,000 against it, you have $200,000 in home equity.

As you pay down a mortgage or the value of your home increases (or both), your equity generally goes up. 

How much can you borrow using a home equity loan? Most lenders won’t loan 100% of your home’s value even if you own it outright. It’s more common for lenders to limit your total debt to around 80% to 85% of the current market value. That limit includes your current mortgage and the new home equity loan, and it’s called the combined loan-to-value ratio.     

Combined loan-to-value (CLTV)

Lenders calculate your combined loan-to-value ratio to figure out how much you can borrow. They want you to maintain a certain amount of equity in your home even after you take out the loan.

Generally, lenders prefer applicants who will have at least 15% to 20% equity remaining after taking out the new loan. They use CLTV to determine where you'll stand depending on how much you borrow.

Here’s an example using the numbers from above. Say you wanted to borrow $50,000. The bank would calculate your CLTV ratio by adding the new loan amount to your existing mortgage balance. That amount is then divided by the home's value:

• $300,000 + $50,000 = $350,000 

• $350,000 / $500,000 = 0.70

• 0.70 x 100 = 70%

The bank allows a CLTV of 80%. In this case, the CLTV is 70%, comfortably below the bank's maximum of 80%. 

How your credit history impacts a home equity loan or HELOC

Lenders use information from your credit history to gauge how likely you are to repay what you borrow. They want to know if you're a low-risk borrower, meaning you have a history of on-time payments, or a high-risk borrower.

If your credit history shows multiple late payments or accounts in collections, lenders could view you as a higher risk. That could affect your application or the interest rate you’re offered.

Lenders typically request your credit report from at least one of the three major credit bureaus: Experian, Equifax, and TransUnion. Most information on your credit report goes back seven to 10 years. The most recent two years tend to carry the most weight. 

Your report will generally include:

• Your credit accounts, including accounts in good standing that were closed within the last 10 years

• The types of accounts you hold (e.g., personal loans, auto loans, credit cards)

• The percentage of your total available credit you currently use

• Your recent payment amounts and whether you’ve paid on time

• Whether you’ve defaulted on any accounts

• Whether you’ve applied for other new credit accounts recently

Documents needed for a home equity loan or HELOC application

Most loans or lines of credit typically take an average of 15 to 18 days to fund, and gathering documents early helps avoid delays. Here’s what lenders typically ask for.

• Proof of identity. You’ll provide your Social Security number, and if you apply with a co-borrower, they’ll need to provide theirs. You may need to show a photo I.D. when you sign your loan documents.

• Proof of income. You could use recent pay stubs if you have regular employment. If you’re self-employed, you may be able to use tax returns or other documents to prove your most recent income. If you’re using Social Security, alimony, or child support to apply, you'll be asked to document that as well.

• List of debts. The lender will usually want to know about any outstanding debts: who you owe, how much you owe, and your monthly repayment amounts. This helps them calculate your DTI and determine how the new loan fits into your overall financial picture.

• Appraisal and title verification. The lender will verify property records to confirm you own the home and that you’ve included any co-owners on your application. Anyone named on the title will either need to be on the loan or sign a document agreeing to it. The lender will also order a professional valuation to confirm your home’s current market value.

If you’re approved, the lender will prepare a contract for you to sign, either electronically or in person. If you’re borrowing to consolidate debt, the lender may pay off your other creditors directly or have the funds transferred to you.

When you’re ready to get started, check your rate through Achieve Loans.

Home equity loan qualifications at a glance

What if you don’t meet the home equity loan qualifications?

Not everyone will qualify on the first try, and that’s OK. You could work on the areas that need improvement and reapply when you’re in a stronger position.

• Build equity. Continue making regular mortgage payments. Extra principal-only payments could help you build equity faster.

• Improve your credit. Take steps to increase your credit score by paying all bills on time and avoiding new debt.

• Lower your DTI. Pay down your existing debt to reduce your ratio. Remember, the lender will include the new loan in their DTI calculations.

• Increase your income. A raise, part-time work, or higher-paying position could improve your DTI ratio.

In some cases, a home equity loan may simply not be the right strategy. Let's review a few other options that might be a better fit:

• Personal loan. An unsecured personal loan doesn’t require collateral, so it could be an option if you don’t have enough equity for a home equity loan.

• Debt relief. If you’re seeking a new loan because you’re overwhelmed by your debt and you’re trying to make it more affordable, debt relief could be an option to consider instead of a new loan. For some struggling borrowers, creditors may be willing to accept less than the full amount you owe but consider the debt fully satisfied. You could negotiate your own debts or hire a professional debt relief company to help you.