How Do Home Equity Loan and HELOC Requirements Differ?

A home equity loan and home equity line of credit (HELOC) offer two ways to tap into your home’s equity. With a home equity loan, you borrow a lump sum. A HELOC provides a revolving line of credit. While the products are different, the requirements to qualify are about the same, although HELOCs might be slightly tougher to qualify for.

Generally, you’ll need a credit score above 620, no more than 43% debt-to-income ratio, and at least 20% equity in your home. Here’s a closer look at what lenders consider to determine whether you might qualify for a home equity loan or HELOC.

What are HELOC and home equity loan requirements?

Eligibility requirements differ by lender, but you can expect most home equity loan and HELOC requirements to be the same. 

For home equity loans and HELOCs, the lender evaluates the risk of giving the borrower a maximum dollar amount against the equity in a collateral property. Lenders base their risk assessment on several specific factors. Understanding how the factors work together to determine if you qualify is helpful. 

Criterion	Typical requirement
Credit score	620+ (varies by lender)
Debt-to-income (DTI) ratio	Up to 36% – 43%
Equity	20% or more

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Credit score

Credit scores top most lenders’ home equity loan requirements list. They use credit scores to gauge how likely you are to repay.

There’s no set minimum for lenders establishing credit score requirements. For example, one lender might accept borrowers with FICO scores in the “fair” credit range, and others may prefer to work with homeowners who have “good” to “excellent” credit scores.

As you can see from the real-life lender examples below, credit score minimums are not standardized across the industry. 

Lender	Product	Min. credit score
Figure	HELOC	640
Aven	HELOC	640
Spring EQ	Home equity loan	620

As a rule of thumb, a higher score can work in your favor when you apply for a home equity product. A good score suggests you’re responsible with credit, which can make it easier to get approved. You may also qualify for lower interest rates, which could affect the total cost of borrowing over the long term. 

Not sure whether your credit score will make the cut? See our guides to HELOCs for bad credit and best home equity loans for bad credit. 

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Income 

Income is another important consideration for lenders to approve home equity loans or HELOCs. Many lenders want a stable monthly income that allows you to make your equity financing payments in addition to your monthly payments on your primary mortgage. 

But even if you have less consistent income from your own business, several lenders approve self-employed borrowers for HELOCs and home equity loans.

No matter how you earn your income, lenders may require you to submit one to two years’ worth of supporting documentation to demonstrate your cash flow. The documentation you may need includes:

• Pay stubs
• W-2s or 1099 statements
• Tax returns
• Profit and loss statements or cash flow statements (if you’re self-employed)

Your lender may not specify a minimum income threshold, but the higher yours is, the better. You might consider increasing your income before applying for a home equity product. It can help improve your DTI ratio. We’ll discuss DTI in more detail below. 

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Amount of equity

It might seem obvious, but you’ll need equity in your home to qualify for a home equity loan or HELOC. Equity is the difference between what you owe on the home and the property’s fair market value when you apply for the loan. It’s also possible (and easier) to get a home equity loan on a paid-off house. 

The loan amount you can qualify for is limited by the amount of equity you have in the property. Generally, lenders’ LTV requirements for a home equity loan or HELOC are at least 10%, if not higher. Lenders use the amount of equity you have to calculate your loan-to-value (LTV) ratio. 

The loan-to-value ratio compares what you still owe on the mortgage to the property’s appraised value. A lower LTV increases your odds of being approved for a home equity loan. It also determines the maximum amount you can borrow with a home equity loan or HELOC.

Figure and Spring EQ require a maximum LTV of 85% and 95%, respectively.

Lender	Product	Max. LTV
Figure	HELOC	85%
Aven	HELOC	89%
Spring EQ	Home equity loan	95%

Calculate your current LTV and how much you’re eligible to borrow with our home equity loan calculator for a better idea of what you’re likely to qualify for. 

Debt-to-income ratio

Lenders also consider your debt-to-income, or DTI, ratio, which is the percentage of your gross monthly income that goes toward debt repayment. Lenders calculate DTI based on your current debt obligations plus your expected payment for the new home equity loan or HELOC. 

A lower DTI is better when applying for any type of financing product. It suggests you have sufficient income to meet all your debt obligations. A higher DTI could put you at greater risk of default if you can’t keep up with your debt payments. 

This is where the requirements may vary for the home equity loan and the line of credit. Lenders typically look for a DTI of 43% or below with home equity loans. However, with HELOCs, some lenders may allow a maximum DTI of 50%.

While Figure doesn’t disclose a maximum DTI for applicants, Spring EQ allows DTI to go up to 45%. 

Lender	Product	Max. DTI ratio
Figure	HELOC	Not disclosed
Aven	HELOC	Not disclosed
Spring EQ	Home equity loan	45%

If your DTI is close to or at the limit for a home equity loan or HELOC, you have several options to decrease it, including:

1. Find ways to increase your income. For example, get a part-time job, increase your hours at work if you’re paid hourly, or start a side hustle. 
2. Pay down some of your debt. Whether this is feasible depends on your cash flow and what you have in savings. But the more debt you can eliminate, the better your approval odds might be when applying for home equity products. Plus, carrying a smaller debt can also improve your credit score.

Ask the expert

Catherine Valega

CFP®

A loan is easier to manage in terms of stability of payments—you know how much you are borrowing, the terms, and the repayment amount each month. This is appropriate for a fixed project—borrow the funds, then pay it back. The HELOC is a “nice to have in place”—in case you need funds for home improvement or otherwise. However, given that the rate attached to the line of credit is not fixed, you’re dependent on interest rates, which may fluctuate for or against you when you need to borrow.

How do requirements for home equity loans vary by lender?

Home equity loans and HELOCs are subject to underwriting, and this process and approval requirements are different for every financial institution. Each lender has its rules for measuring risk, gauging the probability of default, and qualifying borrowers for loans or lines of credit. 

Lenders can provide guidelines regarding credit scores and maximum loan amounts. You can find these details on the lender’s website or by calling its customer service.

Comparing home equity product requirements at different lenders can give you an idea of where you might have a better chance of getting approved. And remember that credit unions, traditional banks, and online banks can all handle home equity products differently. 

Lender	Fees	Rates	Eligibility
Credit union	Fewer	Lower for members	Flexible
Bank	Lower	Discount for banking	Strict
Online lender	Higher	Vary	Varies

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Credit union home equity loan requirements

A credit union is a not-for-profit membership organization that operates for the benefit of its members rather than focusing on the bottom line. Credit unions tend to have more flexibility in their lending guidelines than banks and can accept a higher level of risk. 

Credit unions may charge lower rates and fewer fees for home equity borrowers as an added benefit. 

The downside is that you must meet membership requirements to apply for a home equity loan or HELOC. Membership requirements vary by credit union and may be based on where you work, attend school, live, or worship. 

Traditional bank HELOC requirements

Brick-and-mortar banks tend to be strict about their guidelines and underwriting standards compared to credit unions. For instance, you might need a higher credit score or more equity in the home to qualify. 

Having accounts at the bank and a good banking history could benefit you if you qualify for rate discounts or more favorable loan terms. Navigating the application process may also be easier if you’re working with a trusted banker. 

Online bank borrowing requirements

Online banks can be appealing for a few reasons. For instance, you might find that home equity loan rates or HELOC rates are lower at online banks, or the bank may charge fewer fees, so you pay less in closing costs. 

An online bank may have stricter requirements than a traditional bank to qualify for the best home equity loan rates or HELOC rates. On the other hand, some online lenders specialize in offering loans to people with lower credit scores. You might consider that option if a regular bank turned you down.

When comparing options, it’s important to read the fine print so you know what you’re getting. For example, it’s possible to find lenders offering interest-only HELOCs, which can lower your payments during the draw period. But that can lead to higher payments over the long haul, which could make it more difficult to repay what you owe. 

What are the requirements for a home equity loan by federal and state governments?

A few federal and state regulations regarding home equity loans and HELOCs exist. 

State and federal regulations	Details
State usury laws	Limit interest and fees based on location
Federal tax deduction on interest	Limited to loans used for home renovation
Account freezes	Allowed if property values drop dramatically
3-day cancellation rule	Allows borrowers to return funds within three business days of closing

States may have individual laws limiting how much lenders can charge for interest, origination fees, and other closing costs. 

A change to federal tax law now limits the tax deductibility of mortgage interest on home equity loans and HELOCs. Borrowers can only deduct the interest paid on either loan option if they use the proceeds for a major home improvement.

Additionally, lenders are allowed to freeze or reduce HELOC limits if property values significantly decline. 

You also have the right to change your mind within a few days after signing your home equity loan or HELOC agreement. This is under the Three-Day Cancellation Rule, which allows you to return the funds within three business days and get any fees you paid refunded.

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Ask the expert

Catherine Valega

CFP®

When clients ask about using a loan or HELOC for a project, the first thing we look at is whether their situation in terms of cash flow is positive enough to afford the payments. Sometimes, when that answer is no, we recommend putting that desired home project on hold until their cash flow turns more positive (income increases or expenses decrease).

Alternatives to home equity loans

If you don’t meet the requirements to qualify for a home equity loan or HELOC, you might consider other possibilities. 

Depending on your needs and situation, home equity loan alternatives can include:

• Cash-out refinancing. With a cash-out refi, you replace your current mortgage with a new one. You can withdraw your equity in cash at closing. You may incur more closing costs than other home equity options, plus your interest rate on your original mortgage will change.
• Personal loans. You can use personal loans to cover a variety of expenses, from medical bills to debt consolidation to home improvement projects. The application process for an unsecured personal loan often is simpler because they don’t require collateral. The funding time is also faster because you don’t have to confirm your home value. 
• Line of credit. A line of credit is a revolving credit limit similar to a credit card. Banks and credit unions can offer secured or unsecured lines of credit to borrowers who meet their requirements. This could be a good option if you don’t want to use your home as collateral. 
• Credit cards. You may find getting approved for a credit card easier than a loan. Remember: If you take a cash advance from a credit card, you could pay a much higher APR and a cash advance fee. Another drawback is that credit card limits may be much lower than your home equity loan or line of credit limit. 

Ask the expert

Catherine Valega

CFP®

If family members have the means, I like to discuss “intra-family loans.” Additionally, when my clients have taxable investment accounts, meaning they are not in retirement accounts, we may be able to set up a line of credit on that account. They can borrow funds based on the underlying investments as collateral—which allows them to avoid cashing out investments and incurring possibly high taxable gains.

Regardless of the route you take, it’s important to do your research beforehand. Shopping around can help you find the best loan or line of credit at the most attractive rate based on your financial circumstances.