Requirements for a Home Equity Loan or Line of Credit

Learn about qualifications for borrowing against your home equity

A couple finishes signing paperwork for a home equity loan
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One advantage of being a homeowner is the ability to build up equity in your home. You can tap into that equity with a home equity loan or line of credit to pay for improvement projects, to pay off other types of debt, or to fund another goal.

A home equity line of credit tends to have a lower interest rate than many other types of loans, so you can pay off medical bills or perhaps consolidate credit card debt while paying less interest.

Key Takeaways

  • The amount of your home equity loan or line of credit is based on your home’s equity.
  • A home equity loan or line of credit doesn’t have to be used on home improvement projects. It can be used for debt consolidation, medical bills, student loans, or anything else you choose to spend the proceeds on.
  • You'll need a superior credit score to get a good interest rate on a home equity loan or line of credit.
  • Your debt-to-income ratio is a factor in determining approval for a home equity loan or line of credit.

“Home equity loans and lines of credit are essentially debt that you're leveraging by using the equity in your home,” James Goodwillie, co-owner at Brightleaf Mortgage in Richmond, Virginia, told The Balance by email.

The loan or line of credit is for a particular percentage of the equity you have. “For example, if your home is worth $300,000, and you owe $200,000, you technically have $100,000 of equity in your home,” Goodwillie said.

So how does this work, and what are the requirements?

Home Equity Borrowing Requirements

A home equity loan is a fixed amount of money that's paid back over a specified period of time in fixed monthly installments. A home equity line of credit (HELOC) is not a fixed amount. You can draw money from it up to an approved amount, similar to a credit card, and you'll only pay interest on the amount you borrow. Both have similar requirements.

Equity in the Home

The amount of equity in your home is a determining factor in whether you can borrow money against it and, if so, how much. It’s based on your loan-to-value (LTV) ratio.

“The loan-to-value ratio is the total amount of debt on the home versus the appraised value of the home,” Goodwillie said. Using his example, let’s say your home is worth $300,000, and you owe $200,000. “The LTV would be 66.6% ($200,000/$300,000).”

Note

The LTV ratio comes into play with first mortgages, too. Most lenders will require you to pay private mortgage insurance or PMI if your down payment isn’t large enough to bring your LTV down to 80%.

Goodwillie also said you can't borrow more than 90% of your combined loan-to-value (CLTV). This includes all the loans you have against your property. “In this particular example, you could open a home equity line up to $70,000, because $70,000 + $200,000 = $270,000, and then $270,000/$300,000 = 90%.”

Credit Score Requirements

As with most financial transactions, a good or excellent credit score can make a significant difference. A FICO score of at least 700 is good enough for a home equity loan or line of credit, although some lenders may accept a score of 640 or even lower. A score below these thresholds may be accepted by some lenders but could result in paying a higher interest rate.

Score Range Rating Note
800 or higher Exceptional Well above average of U.S. credit scores; indicates exceptionally low risk
740-799 Very Good Above average of U.S. credit scores; indicates the borrower is very dependable
670-739 Good Near or slightly above average U.S. credit scores; most lenders consider this a good score
580-669 Fair Below average of U.S. credit scores although many lenders will still provide credit to borrowers in this range
Less than 580 Poor Credit scores well below average; indicates the borrower may be a risk.
Source: FICO

A Healthy Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is another factor that lenders will consider. DTI refers to how much money you make monthly compared to how many expenses you must pay monthly. “Under 43% is the standard,” Goodwillie said. But some lenders may accept as much as a 47% DTI ratio.

Your lender will let you know what's acceptable, but you should aim for something in the neighborhood of these perimeters.

Note

Add up your monthly debt payments and divide by your gross monthly income to calculate your debt-to-income ratio. Multiply the result by 100 for a percentage. For example, a family might have total monthly debt payments, including a car, mortgage, and credit cards, of $1,900. They might have a gross monthly income before taxes of $6,500. The math is $1,900 / $6,500 = 0.292 x 100 = 29.2%. That’s healthy enough to qualify for a HELOC or home equity loan, assuming other requirements are met as well.

Income Requirements

Most lenders don't have carved-in-stone income thresholds that you must meet to qualify for a home equity loan or line of credit, but they will almost certainly want to confirm your income to make sure you have the means to repay the loan. You'll most likely be asked to substantiate your income with pay records or income tax returns.

As with all loans, the more income you have, the better your chances are of qualifying. And your income can offset or enhance other qualifying factors. It affects your DTI ratio, and your interest rate will probably be more favorable if you have both good income and excellent credit.

Payment History

Most late payments you make will be reflected in your credit score and on your credit report. You can probably count on a lender wanting to investigate the situation further if any appear on your record.

Late payments over a limited period of time years ago might indicate that you went through a temporary financial crisis, such as job loss. But late payments scattered throughout your borrowing history can indicate a lack of responsibility for repaying your obligations or an inability to do so. This could affect whether you qualify for a home equity loan or HELOC, depending on other factors.

Should You Borrow Against Your Home's Equity?

Another important decision is whether you should borrow against your home's equity. “Depending on how long you're planning to stay in the home, it can be a valuable tool in tapping into the equity because you don’t pay all the closing costs like you would on a cash-out refinance,” Goodwillie said.

However, he said that there are two factors you should keep in mind. “First, it is more expensive. The rates are often much higher than the mortgage rates.”

Goodwillie also said that it’s important to remember that a HELOC or home equity loan will result in another lien against your home, just like a second mortgage. “So when you go to refinance in the future or sell your home, you'll have to deal with loan/debt companies that you're responsible for paying off. This can lead to a more expensive and time-consuming process when that time comes.”

Alternatives To Borrowing Against Home Equity

You have alternatives to borrowing against your home’s equity to finance a home renovation or pay down debts. For example, you can use a credit card with a low interest rate, a personal loan, or a CD loan.

Another alternative is to seek a cash-out refinance, although that’s a more involved and a more expensive process.

The Bottom Line

It can be tempting to take out a home equity loan or line of credit if you have substantial equity in your home. But keep in mind that this is another financial obligation, in addition to your first mortgage, that must be repaid. Look at the other circumstances of your life to be sure it's worth it. Is your job secure? Are you nearing retirement age? Are your kids about to head off to college?

You can dip into your home equity for income by taking out a reverse mortgage in retirement...always assuming you have sufficient equity remaining if you've taken out a home equity loan or HELOC. As for those college educations, they might be a very good reason to tap into your equity now.

Frequently Asked Questions (FAQs)

Can you get a home equity loan with bad credit?

You may still qualify for a home equity loan if your credit score is below the recommended range, but your interest rate will no doubt be higher. It’s usually advisable to try to improve your credit score before applying.

How many paychecks are usually necessary to meet the income requirements for a home equity loan?

Your lender can tell you the specific number of pay stubs it will need but expect to collect at least two and possibly more. You'll also probably have to provide tax records and financial statements.

How long does it take to get approved for a home equity loan or line of credit?

The exact amount of time it takes for a home equity loan or line of credit to be approved varies by lender, but you can expect it to take from 30 to 45 days. The lender will notify you when your loan or line has been approved or denied. A closing date will be scheduled if it's approved.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Trade Commission. "Home Equity Loans and Credit Lines."

  2. The Federal Reserve Board. "What You Should Know About Home Equity Lines of Credit," Pages 3-4.

  3. Experian. "What Credit Score Do I Need to Get a Home Equity Loan?"

  4. Consumer Financial Protection Bureau. "Debt-to-Income Calculator," Page 2.

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