Requirements for a Home Equity Loan or HELOC

Credit score, DTI, and equity each play a part

A couple looks over paperwork.
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Home equity loans and home equity lines of credit (HELOCs) are two lending products that allow homeowners to borrow against the equity in their homes. A HELOC is a form of revolving credit, like a credit card, while a home equity loan is a set amount of money that you borrow upfront and pay back over a fixed period of time. These products are often used when homeowners need money for debt consolidation, home renovations, medical bills, education, and other large expenses.

If you're considering a home equity loan or HELOC for an upcoming expense, it's important to understand the requirements, including whether you're eligible and how much you can borrow. We'll dive into all of that and more in this guide.

Key Takeaways

  • Lenders limit the amount you can borrow with a home equity loan or HELOC, with a maximum of 80% to 85% of your equity.
  • To qualify for a home equity loan or HELOC, most lenders require a credit score in the mid-to-high-600s.
  • To be eligible for home equity loans or HELOCs, you’ll generally need a debt-to-income ratio (DTI) of 43% or lower.
  • Before taking out a home equity loan or HELOC, shop around for the best rates and terms.

Equity Requirements

“Equity” refers to the amount of ownership you have in your home or the difference between your property’s value and the amount you still owe on a mortgage or other secured debt.

When buying a home or borrowing against your home equity, lenders generally limit the amount you can borrow to a certain percentage of the home’s value. Doing so protects the lender so that if you fail to repay your loan, it can recover the amount it is owed by selling the home.

The equity requirements for a home equity loan or HELOC are stricter than for a mortgage. When taking out a conventional mortgage, borrowers can often finance up to 97% of the value of the home. But with a home equity loan or HELOC, many lenders only allow you to borrow up to 80% of your home’s equity. So if you have a home worth $300,000 and you owe nothing on it, you could borrow up to $240,000. If you have a mortgage of $200,000, a home equity loan provider would only allow you to borrow $40,000 ($240,000 minus the $200,000 you owe).

Even if you have enough equity to take out a loan, some lenders may have requirements for how long you must own a home before you can borrow against your equity. Some may allow you to get a home equity loan or HELOC after just a month of owning the home. However, you would still have to meet the equity requirements.

Credit Score Requirements

There is no standard minimum credit score needed to borrow against your home’s equity, but lenders generally require credit scores in the mid-to-high-600s to qualify for a home equity loan or HELOC. That said, some lenders may have slightly lower requirements, especially for borrowers who have solid finances in other ways.

Be wary of lenders who offer equity financing to borrowers with poor credit. While it may sound like an attractive offer, there’s often a catch. Loans available to borrowers with credit scores below 620 often come with higher interest rates and other unfavorable terms.

Keep in mind that even if you qualify for a home equity loan or HELOC with your credit score, you may not qualify for the best interest rates. Although many lenders offer equity financing to borrowers with credit scores in the mid-to-high-600s, the best interest rates are generally reserved for borrowers with scores of 740 or higher.

Remember that even with an adequate credit score, you may be denied based on your credit history. Your credit report shows your payment history, including whether you’ve defaulted on any loans or failed to make your payments on time. Late or missing payments will also lower your credit score.

Note

Missing or late payments on your credit report may cause a lender to deny your application for a home equity loan or HELOC.

Debt-to-Income Requirements

Another important factor lenders consider for home equity loans, and HELOC eligibility is your debt-to-income ratio (DTI). Your DTI is the ratio of what you owe to what you earn—in other words, the percentage of your income that goes toward debt payments.

The most important figure lenders consider is your back-end DTI, which is the percentage of your income that goes toward all debt, including your housing payment. While the DTI requirement may differ depending on your lender, 43% is generally the highest DTI ratio a borrower can have and still get a qualified mortgage (a loan with features that make it more likely you’ll be able to afford payments).

To verify your DTI, lenders will confirm the amount of debt you have and your monthly payments. They may do this by running your credit report or reviewing statements provided by your other lenders. They may also verify your income using tax documents, pay stubs, or by reaching out to your employer.

How to Apply for a Home Equity Loan or HELOC

You can apply for equity financing with your current mortgage lender, but it’s not required. Instead, consider researching other lenders, including their interest rates and terms, to find the one that best fits your needs. Check out reviews by objective third parties such as The Balance’s list of the best HELOC lenders.

As you prepare to apply for a home equity loan or HELOC, be sure you’ve gathered all the necessary information. A few things you’ll want to have on hand include:

  • Proof of income
  • Recent appraisal or assessment
  • Property tax bill
  • Social Security number
  • Information about your existing mortgage
  • Documentation of other debts
  • Copy of your homeowners' insurance policy

Frequently Asked Questions (FAQs)

Do HELOCs require appraisals?

Whether or not you need a full appraisal for a HELOC depends on your lender. Although there is usually some type of appraisal, a full appraisal isn’t always required. Some lenders offer alternatives such as an automated valuation model, or AVM, which uses local property tax and home sale information to estimate your home’s value.

Do you have to pay off a HELOC when you’re refinancing your mortgage?

In some cases, a HELOC may affect your ability to refinance your mortgage. You'll have to get approval from your HELOC lender before you refinance, and if the lender refuses, you will not be able to refinance until you pay off your HELOC. You may also need to pay off your HELOC as a condition of your new first mortgage. Some lenders won't allow a subordinate lien to be outstanding when placing a new one. Check with your new lender too.

Note

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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. Fannie Mae. “Eligibility Matrix,” Page 2.

  2. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  3. Credit Union of Southern California. “How Soon Can You Get a HELOC After Purchasing a Home?

  4. Consumer Financial Protection Bureau. “Buying a Home? The First Step Is To Check Your Credit.”

  5. Consumer Financial Protection Bureau. “What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?

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