Home Equity Loan and HELOC Requirements

A home equity loan and home equity line of credit (HELOC) offer two different ways to tap into your home’s equity. Home equity loans and HELOCs are both types of second mortgage loans.

With a home equity loan, you borrow a lump sum of money that’s repaid in installments with interest. With a HELOC, on the other hand, you have a revolving line of credit that you can draw against for a set period of time.

What are the requirements for a home equity loan or HELOC? Understanding what lenders consider can help you determine whether you might qualify for a home equity loan or HELOC.

In this guide:

• What are home equity loan and HELOC requirements?
• Here are the credit score requirements for two home equity lenders
• Here are the loan-to-value requirements for two home equity lenders
• How do home equity loan requirements vary by lender?
• Are there any federal or state lending requirements?
• Alternatives to home equity loans

What are home equity loan and HELOC requirements?

While requirements differ from lender to lender, you can generally expect that whatever the requirements are for a home equity loan at a particular institution, that institution will have the same requirements for their HELOC. 

For both home equity loans and HELOCs, the lender evaluates the risk associated with giving the borrower a maximum dollar amount against the equity in a collateral property. More specifically, lenders base their risk assessment on several specific factors and it’s helpful to understand how each of them work together. 

Credit score

Credit scores are typically at the top of the list of home equity loan requirements. Lenders use credit scores to gauge how likely you are to repay the money that you borrow.

Lenders can decide where to set the bar when establishing minimum credit score requirements. For example, one lender might accept borrowers with FICO scores in the “fair” credit range while others may prefer to work with homeowners who have “good” to “excellent” credit scores.

Here are the credit score requirements for two home equity lenders:

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

Income 

Income is another important consideration for lenders when approving home equity loans or HELOCs. Lenders want to see that you have a stable monthly income which will allow you to make your payments to them, in addition to the payments to your primary mortgage. 

Lenders may require you to submit one to two years worth of supporting documentation to demonstrate your income. The kinds of things you may be asked for include:

• Pay stubs
• W-2s
• 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 want to consider finding ways to increase your income before applying for a home equity product, as that can help to improve your debt to income (DTI) ratio. We’ll discuss DTI a bit later. 

Amount of equity

It might seem obvious but it’s worth noting that you’ll need equity in your home in order to qualify for a home equity loan or HELOC. Equity is the difference between what you owe on the home and what it’s worth. 

The loan amount you can qualify for will be limited by the amount of equity that you have in the property. As a general rule, lenders expect you to have at least 10% to 20% equity in the property. Lenders use the amount of equity you have to calculate your loan-to-value (LTV) ratio. 

Loan-to-value ratio is simply a comparison of 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 that you’ll be able to borrow with a home equity loan or HELOC.

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

Here are the loan-to-value requirements for two home equity lenders:

Debt-to-income ratio

As mentioned in our discussion of income, lenders will also look at your debt-to-income ratio. Your debt-to-income ratio reflects the percentage of your gross monthly income that goes toward debt repayment each month.

Lenders calculate DTI based on your current debt obligations plus your expected payment for the home equity loan or HELOC. 

A lower debt-to-income ratio is better, as it suggests that you have sufficient income to meet all of your debt obligations. A higher DTI, on the other hand, could put you at greater risk of default if you’re unable to keep up with your various debt payments. 

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

If your DTI is close to or at the limit for a home equity loan or HELOC, there are a couple of things you could do to bring it down. First, you could find ways to increase your income. So you might get a part-time job, increase your hours at work if you’re paid hourly, or start a side hustle. 

The other possibility is to pay down some of your existing debt. Whether that’s feasible can depend 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.

How do home equity loan requirements vary by lender?

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

Lenders can, however, provide some guidelines regarding things like credit scores and maximum loan amounts. You can usually find these details on the lender’s website or by calling them. 

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 keep in mind that credit unions, traditional banks, and online banks can all handle home equity products differently. 

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 are able to accept a higher level of risk. 

As an added benefit, credit unions may charge lower rates and fewer fees for home equity borrowers. 

You’ll need to meet membership requirements to apply for a home equity loan or HELOC. Membership requirements can vary by credit union and may be based on where you work, go to school, live, or worship. 

Traditional bank HELOC requirements

Brick-and-mortar banks tend to be relatively strict about their guidelines and underwriting standards when compared to credit unions. You might need to have a higher credit score to qualify, for instance. Or you may need to have more equity in the home in order to qualify. 

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

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 rates on a home equity loan or HELOC. On the other hand, there are online lenders that specialize in offering loans to people with lower credit scores. You might consider that option if you’ve been turned down by a regular bank.

When comparing any of these 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 term. But that can lead to higher payments over the long haul, which could make it more difficult to repay what you owe. 

Are there any federal or state lending requirements?

There are a few federal and state regulations regarding home equity loans and HELOCs. The federal government sets a maximum legal interest rate for a HELOC of no more than 10% above the U.S. Treasury rate set for second liens.

States may have individual laws limiting how much lenders can charge for origination fees and other closing costs. Federal regulations also set the 43% maximum debt-to-income ratio on home equity loans.

Finally, 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.

Alternatives to home equity loans

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

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

• Cash-out refinancing. With a cash-out refi, you’re replacing your current mortgage with a new one. You can withdraw your equity in cash at closing. 
• Personal loans. A personal loan can be used to cover a variety of expenses, from medical bills to debt consolidation to home improvement projects. The application process for an unsecured personal loan is typically simpler, since they don’t require any collateral to qualify. 
• Line of credit. A line of credit is a revolving credit limit that works similar to a credit card. Banks and credit unions can offer secured or unsecured lines of credit to borrowers who meet their requirements.
• Credit cards. You may find it easier to get approved for a credit card vs. a loan. Keep in mind that if you decide to take a cash advance from a credit card, you could pay a much higher APR as well as a cash advance fee. 

Regardless of the route you decide to 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.