Qualifying for a home equity loan, or HELOC, typically depends on three main factors: the amount of equity in your home, your credit history, and your debt-to-income ratio. In addition, lender requirements can vary widely, so the figures below should be considered general ranges, not standards that guarantee approval.
What are the requirements for a home equity loan, or HELOC?
When reviewing an application for a home equity loan or HELOC, lenders typically consider several factors:
- The net worth of the property, which usually needs to be high enough to leave 15 to 20 percent of the property’s value unused after the new loan or line of credit is added
- The credit score, with many lenders looking for scores in the low 600s or higher, although some programs may accept lower scores depending on other parts of the application
- The debt-to-income ratio, which includes the payment on the new loan or HELOC and doesn’t just consider your existing debts
- Stable, verifiable income, which often includes at least two years of employment or self-employment
- Property eligibility, as it’s usually easier to qualify for a primary residence, while second homes and rental properties often have stricter requirements
None of these factors alone determine whether you’ll qualify. For example, a borrower with a lower net worth may still qualify because of strong credit, while someone with a lower credit score may still qualify because of more equity in their home. Lenders look at your overall financial situation when reviewing an application.
Home Equity Loan Requirements vs. HELOC Eligibility Requirements, What’s Really Changing?
A home equity loan provides you with a lump sum up front and usually has a fixed interest rate and fixed monthly payments. A HELOC works more like a revolving line of credit that allows you to borrow as needed and usually has a variable interest rate.
The eligibility requirements for these two products are largely similar, as both are secured by the equity in your home. However, how the qualifying payment is calculated can be different. For example, during the HELOC drawdown period, the payment used to qualify may be calculated differently than the fixed payment on a home equity loan.
For a detailed explanation and comparison of how these products work, see our HELOC vs. Home Equity Loan Comparison.
Combined Loan-to-Value (CLTV), How Much Home Equity Do You Really Need?
The combined loan-to-value, or CLTV, measures your total secured debt compared to the current value of your home. It’s calculated by adding up your current mortgage balance and your new home equity loan, or HELOC, and then dividing that amount by the value of your property.
The CFPB’s Consumer Guide to Home Equity Lines of Credit explains borrowing capacity based on the net worth you’ve built compared to the amount you still owe, which is essentially what CLTV measures.
Many lenders set their maximum CLTV at 80 to 90 percent. The exact limit depends on the lender, your credit history, and whether you’re applying for a HELOC or a fixed-rate mortgage.
For example, let’s say your home is worth $450,000 and your current mortgage balance is $300,000. If the lender sets the maximum CLTV at 85 percent, your total secured debt could be $382,500. That would leave about $82,500 available for a new home equity loan or HELOC. With a CLTV limit of 80 percent, the available amount would be closer to about $60,000.
Credit Score and Debt-to-Income Ratio Guidelines
Credit requirements for home equity loans and HELOCs are typically stricter than the minimum requirements for some government-backed loans, although they may be less restrictive than those for jumbo home equity loans. Even after you meet a lender’s minimum credit score requirement, a higher score can often help you qualify for a better rate.
Debt-to-income ratios work in much the same way. Lenders add the proposed home equity loan payment to your current monthly debt when calculating DTI. The amount of debt a lender will accept depends on the lender’s own guidelines and the strength of the other components of your application.
There is no single DTI limit that applies to all lenders or all home equity loan products, so it’s best to ask your loan officer what ratio will be used for your specific application.
If your credit score isn’t where you want it to be
A lower credit score doesn’t necessarily mean you’re out of luck when it comes to getting a home equity loan. However, it may mean a higher interest rate, a smaller line of credit, or less favorable terms.
If credit is your main concern, see our guide to home equity loans for buyers with weaker credit for options designed to address these needs.
A homeowner who uses a HELOC to finance renovations and remains within the CLTV limit
Consider a teacher who owns a home worth $380,000 and still owes $240,000 on her mortgage. That gives her $140,000 in equity in her home.
Her lender has set a maximum CLTV of 85%, meaning the total amount secured by the property cannot exceed $323,000. This gives her about $83,000 in potential borrowing capacity.
She wants to borrow $60,000 through a HELOC to remodel her kitchen, which is significantly below the lender’s CLTV limit. Her credit score is in the low 700s, and her DTI is still manageable after adding the new HELOC payment.
Because his requested amount remains below the CLTV limit and his credit and income meet the lender’s requirements, he qualifies for a HELOC without having to go to a higher CLTV program, which may have a higher rate.
In which areas does mortgage.shop offer home equity loans and HELOCs?
Home equity loans and HELOCs are not available in all states we serve. Our full suite of home equity products, including all loan types, is currently available in 19 states. Before planning on a home equity loan or HELOC, ask your loan officer if your state is eligible.
You can also use our home equity financing calculator to estimate your potential borrowing capacity before you apply. Tennessee homeowners can also check out Tennessee’s equity-backed mortgage options for information specific to this market.
Documents you’ll need to apply
- Recent pay stubs, or two years of tax returns if you’re self-employed
- Current mortgage statement
- Proof of homeowners’ insurance
- Government-issued identification
- HOA documents, if the property is part of a homeowners’ association
