If you’re looking to tap into your home’s equity, your borrowing options include a home equity loan or a home equity line of credit (HELOC). These two products work differently but have similar eligibility requirements.
You’ll need at least 15% equity in your home to qualify. You also must meet the lender’s credit, income, and debt-to-income (DTI) ratio requirements.
Every lender sets its specific borrowing criteria, but you’ll see many of the same general requirements among lenders.
In this guide:
- How do I qualify for a home equity loan or HELOC?
- Specific lenders’ requirements to qualify for a HELOC or home equity loan
How do I qualify for a home equity loan or HELOC?
The specific criteria for home equity loans and HELOCs can vary by lender, but the general requirements tend to be the same. We’ve researched five standard requirements to qualify for a home equity loan or HELOC.
Requirement 1: Sufficient equity in your home
First, you’ll need enough equity. Most lenders want to see at least 15%.
Equity is the difference between what you owe on your mortgage and the current value of your home.
To calculate your equity, follow the formula below to determine a percentage:
Equity = Home’s current value – Outstanding mortgage balance
Let’s say, for instance, you owe $200,000 on a home valued at $400,000. In this case, your equity is $200,000—or 50% based on the math below:
(Equity / Home’s current value) x 100
($200,000 / $400,000) x 100 = 50%
That’s sufficient to borrow a home equity loan or HELOC if the lender requires 15% equity.
The current value of your home comes from a formal appraisal, which most lenders will need before closing on your new loan. You might get a surprise if your home doesn’t appraise for as much as you think it’s worth. In that case, the lender may offer you a smaller loan.
Requirement 2: Loan-to-value (LTV)
Along with sufficient equity, you must meet a lender’s requirements for loan-to-value (LTV) ratio. LTV compares your mortgage balance with your home’s current value.
If you’ve already borrowed against your home, lenders look at your combined loan-to-value ratio (CLTV). Most lenders look for LTV or CLTV lower than 85% or 90%.
Calculate your ratio by adding up the secured loans on your home, such as your mortgage and home equity loans or lines of credit, and dividing by your home’s value:
CLTV = [(Outstanding mortgage balance + Other liens on home) / Home’s current value] x 100
Requirement 3: Good credit
As with most loans, you’ll need to meet a lender’s credit requirements to take out a home equity loan or HELOC. Lenders review your credit report to ensure you pay back your debts on time and don’t have a history of delinquencies or defaults.
Most look for a credit score of 620 or higher, though some require at least 700. Your credit score can affect your interest rate, with a stronger score qualifying for better rates on a home equity loan or HELOC.
Requirement 4: Sufficient income
Lenders also examine your income to ensure you can repay your home equity loan or HELOC in full and on time. When you apply for the loan or HELOC, you must provide documentation as proof of employment and income.
This may include the following:
- Pay stubs
- Tax returns
- Proof of Social Security benefits
- Other benefit or income statements
Requirement 5: Acceptable debt-to-income ratio
Another crucial factor is your debt-to-income (DTI) ratio—the amount you pay each month toward debts compared to your monthly income. Lenders want to ensure you’re not overborrowing and have the means to take on additional debt.
Most look for a DTI under 43%, but some have lower requirements. Calculate your DTI by adding up your monthly debt payments—such as a mortgage, student loans, or child support. Divide that sum by your gross monthly income, and multiply by 100 to convert it to a percentage:
DTI = [(Sum of monthly debt payments) / Gross monthly income] x 100
To give an example, let’s say you take home $4,000 per month and make debt payments totaling $1,700. Your DTI would be 42.5%:
($1,700 / $4,000) x 100 = 42.5%
If your lender’s maximum DTI is 43%, your DTI meets its requirements.
If your DTI exceeds the lender’s maximum, you may need to pay off some of your debts before you can borrow against your home equity.
Specific lenders’ requirements to qualify for a HELOC or home equity loan
We’ve researched the eligibility requirements for five lenders that provide home equity loans, HELOCs, or both.
|Product||Min. Credit Score||Max. DTI||Max. LTV|
|Bank of America||HELOC||Not disclosed||Not disclosed||85%|
|Discover||Loan||620||Not disclosed||90% (varies by state)|
|PNC||HELOC||680||Not disclosed||89.9% (varies by state)|
What is the most important factor to qualify for a HELOC or home equity loan?
Perhaps the most critical factor in qualifying for a HELOC or home equity loan is sufficient equity in your home. Most lenders require at least 15% equity in your home to be eligible for a loan or HELOC.
To calculate your equity, subtract the amount you owe on your mortgage from your home’s current value.
If you owe $200,000 on a home valued at $300,000, for example, your equity is about $100,000, or 33%.
Do I need to meet every requirement to qualify for a home equity loan or HELOC?
You may need to meet every requirement to qualify for a home equity loan or HELOC, but specific lenders are more flexible than others.
For instance, some lenders may be willing to consider a lower credit score if your other financial qualifications are strong or if you apply with a cosigner.
What is easier to qualify for: a home equity loan or a HELOC?
Home equity loans and HELOCs often have the same requirements for credit, income, and other factors, though the exact criteria vary by lender. In other words, if you can qualify for a home equity loan with a lender, you can expect to qualify for its HELOC.
However, loans and HELOCs are different, so they’re worth exploring before you choose one. Our guide comparing home equity loans with HELOCs can help you determine the suitable product.
What can I do if I don’t qualify for a HELOC or home equity loan?
If you don’t qualify for a HELOC or home equity loan, you may consider applying with a creditworthy co-applicant. Adding a cosigner to your application could reduce risk in the eyes of the lender and help you get approved. A cosigner is a person who has stronger credit and agrees to take responsibility for your loan in case you can’t pay it back.
You can also identify which requirements you’re unable to meet and work on strengthening your application. If it’s a credit issue, for instance, take steps to improve your credit before applying.
Finally, consider exploring alternative forms of financing, such as a personal loan, to access the funds you need.