What are the requirements for a home equity loan?

Your home is more than just a roof over your head. It might also be the cornerstone of a solid financial plan. That's because you could potentially use your home's equity—its value above what you owe—to secure a home equity loan.

The requirements for a home equity loan typically include having equity in your home, a solid credit score, verifiable income, and manageable debt. Lenders also consider your loan-to-value ratio, debt-to-income ratio, and may require an appraisal to confirm your home’s value. Exact home equity loan requirements vary by lender, but most of them follow similar guidelines. 

Borrowing money from your home's equity could help you reach your financial goals—whether it’s paying off debts, paying for an emergency, or fixing up your home.

Here’s what you need to know about the requirements for a home equity loan. 

Typical requirements for a home equity loan at a glance

• At least 15% to 20% home equity (combined LTV typically ≤80% to 85%)

• A credit score of 600 or higher (varies by lender)

• Verifiable income and employment history

• A debt-to-income (DTI) ratio within lender limits

• A qualifying property appraisal

What are the requirements for a home equity loan?

The requirements for a home equity loan can vary based on the terms and lender. Most home equity lenders consider the same factors:

• Home equity. Lenders require you to maintain a certain amount of equity in your home, usually at least 10% to 20%. This includes the new home equity loan or HELOC. Lenders often use your combined loan-to-value (CLTV) to determine how much you can borrow.

• Credit history. Lenders will check your credit reports to learn how you handle debt and whether you pay your bills on time. A long history of on-time payments could help show the lender you're a reliable borrower.

• Debt-to-income ratio (DTI). This is calculated by adding all your monthly debt payments and dividing the total by your pre-tax monthly income. Most lenders have a maximum DTI that's acceptable, usually between 36% and 43%.

• Income and employment history. In addition to using your income to calculate your DTI, lenders will also want to ensure your income is steady. At least two years of regular employment can help show that you have a reliable income.

In short, lenders want to know that you can afford any loan you take out and that you’re likely to pay it back as agreed. For the longer version, keep reading.

Requirements to get a home equity loan

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, 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. That equity is a valuable asset you could borrow against to consolidate credit card debt, pay for repairs and renovations, or cover emergency expenses.

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% of the current market value. That 80% limit includes your current mortgage and the new home equity loan.

Combined loan-to-value (CLTV)

Lenders calculate your combined loan-to-value (CLTV) 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 look for applicants who will have a minimum of 15% to 20% equity left over after getting the 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 combined loan-to-value (CLTV) ratio, which adds the new loan 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

Lenders use information from your credit history to determine 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.

For example, if your credit history shows multiple late payments, lenders may not feel you'll repay your loan as agreed. This could affect your ability to get approved for a home equity loan. 

Lenders typically request your credit report from at least one credit bureau to look at your credit history. Three major credit bureaus track your credit history: Experian, Equifax, and TransUnion. They all collect similar information about your experience with credit as reported by your creditors.

Most information on your credit report goes back seven to 10 years. The most recent two years tend to have the most influence on your credit score. Your credit report will generally show:

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

• Type of account (personal loans, auto loans, credit cards, etc)

• Percentage of your total credit you currently use

• Amounts of your recent payments

• Whether you’ve paid late or defaulted

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

What are the credit score requirements for a home equity loan?

The specific credit score required for a home equity loan will vary by lender and loan terms. Most lenders will have a minimum credit score requirement of 600 to 640, though some lenders may be more or less flexible. 

Credit score requirements can also vary based on your equity, income, and overall financial profile. If you’re borrowing to consolidate debt, you might qualify with a lower credit score.

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

What are the DTI requirements for a home equity loan? 

Your debt-to-income ratio (DTI) measures your total monthly debt payments, including the home equity loan, against your gross (pre-tax) monthly income. It's designed to give a rough idea of how affordable your debt is.

Maximum DTI limits vary by lender. A low DTI indicates your debt is manageable and shows lenders you’re more likely to pay your bills. 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, there are two ways to improve it:

• Increase your income. This could be getting a raise, taking on more hours, or adding a side hustle.

• Decrease your debt load. For example, if you pay off a credit card or other debt, your DTI should drop. 

Try an online debt-to-income calculator to crunch the numbers on your DTI. You can also use the calculator to explore your options if your DTI isn't where you want it to be.

Documents needed for a home equity loan application

When applying for a home equity loan, you’ll typically be asked to submit proof of identity, document your income, and provide a list of debts. The bank will also verify that you own your home and may ask you to submit documentation from a recent professional appraisal. 

Here’s a more thorough explanation of what documentation you’ll need to have ready: 

• 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 money to, and how much you pay each month.

• Appraisal and title. The bank or credit union making your home equity loan will verify property records to make sure you own your home and that you’ve included any co-owners on your application. Anyone named on the title will either need to be included on the loan or sign something saying they agree to the loan. The lender will also check your home’s current value by conducting a professional appraisal. 

You could streamline the application process by gathering as many of these documents as possible before applying.

Once you’re approved, the bank or credit union will write a contract for you to sign, either electronically or in person. If you’re consolidating existing debt, they may use the loan to pay off your other creditors directly. Otherwise, they’ll transfer the funds to you.

Depending on your situation, the whole process can take as long as a few weeks or as little as 10 days. Most home equity loans take an average of 15 to 18 days to fund.

Considering a home equity loan? Check your rate with no credit impact.

What if you don't qualify for a home equity loan?

The requirements for a home equity loan are fairly strict, and not everyone will qualify at first. You can hone in on the areas that need work and turn yourself into a better applicant. Here are some steps that may make it easier to get a home equity loan:

• Build equity. Continuing to make regular mortgage payments can help you increase your home equity. Making extra principal-only payments can help to reduce your loan balance even more, helping you build equity faster.

• Improve your credit. Taking steps to increase your credit score could make you more qualified for a home equity loan. Take care to pay every bill on time and avoid taking on new debt. 

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

• Increase your income. If you have insufficient income, look for ways to generate more income. Getting a part-time job, side hustle, or replacing your full-time job with one that pays more could help. Increasing your income may also help to reduce your DTI.

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

• Home equity line of credit (HELOC). A HELOC is like a reusable home equity loan. You could borrow, repay, then borrow again and again, up to your limit during the draw period. It might be a better fit if you have a long remodel that may require multiple payments over a few years.

• 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 overwhelmed by your debt and you know you won’t be able to pay it off, you could look into debt relief. Debt relief means negotiating with your creditors to accept less than the full amount you owe. You can do this yourself or hire a professional debt relief company to help you.

Whether your goal for a home equity loan is to consolidate debt, remodel your home, or start a small business, the ability to access the equity you've built up is one of the loan's most attractive features. If you decide a home equity loan isn't the right financial tool for you right now, it's good to know you have additional options.