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- To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow for 15 percent.
- You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
- Lastly, lenders will want to see steady and adequate income, even if you have a lot of equity, and for you to be in good standing on your mortgage payments.
One of the biggest benefits of homeownership is the ability to build equity. When you accumulate enough, typically over time by paying down your mortgage, you can borrow against it through a home equity loan or home equity line of credit (HELOC). Here are the requirements to be eligible for either of these financing options in 2023.
What are HELOCs and home equity loans?
Both HELOCs and home equity loans allow you to borrow money based on the equity you have in your home. Here is a quick comparison between the two:
|HELOC||Home Equity Loan|
|Overview||A variable line of credit with a draw period of 5-10 years when you can pull out funds as needed||A loan for a fixed amount, delivered in a lump sum|
|Terms||Up to 30 years (10-year draw period, 20-year repayment period)||5-30 years|
|Repayment||Up to 20 years||Up to 30 years|
|Monthly payments||Interest-only during draw period, then principal and interest during repayment period||Principal and interest payments during repayment period|
HELOC and home equity loan requirements in 2023
Regardless of which type of loan you choose, home equity loan requirements and HELOC requirements tend to follow these standards:
- A minimum percentage of equity in your home
- Good credit
- Low debt-to-income (DTI) ratio
- Sufficient income
- Reliable payment history
At least 20 percent equity in your home
To find your LTV, divide your current mortgage balance by your home’s appraised value. If your loan balance is $150,000, for example, and an appraiser values your home at $450,000, you would divide the balance by the appraisal for an LTV ratio of about 33 percent. This means you have 67 percent equity in your home.
When you apply this ratio to both your first mortgage and the HELOC or home equity loan, you get the combined loan-to-value (CLTV) ratio. This is the figure lenders use to determine how much equity you could be eligible to tap. Most lenders require you to maintain a minimum of 20 percent equity (although some allow 15 percent).
Using the example above, say you’d like to take out a home equity loan for $30,000. Your combined balances would equal $180,000 ($150,000 first mortgage + $30,000 home equity loan). This translates to a 40 percent CLTV ratio ($180,000 / $450,000), which is under the lender’s 80 percent maximum.
Credit score in mid-600s
Many lenders allow you to tap your equity with a credit score in the mid-600s (680 is common). You won’t get the best rate with a lower score, however.
Some lenders also extend loans to those with scores below 620, but these lenders might require you to have more equity or carry less debt relative to your income. Bad credit home equity loans and HELOCs could come with higher interest rates, limited loan amounts and shorter repayment periods.
Before applying for a home equity product, take steps to maintain or improve your credit score. This involves making timely payments on loans or credit cards, paying off as much debt as possible and avoiding new credit applications.
DTI ratio of 43 percent or less
The debt-to-income (DTI) ratio is a measure of your gross monthly income relative to your monthly debt payments, including your mortgage and home equity loan payments. Qualifying DTI ratios can vary from lender to lender, but, in general, the lower your DTI, the better. Most home equity lenders look for a DTI ratio of no more than 43 percent.
To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income, then multiply that result by 100 to get a percentage. If that percentage exceeds 43 percent (or whatever your lender’s specific threshold is), you have a few options: You can work to pay off as much debt as you can; increase your income; or lower the loan amount.
There isn’t a set income requirement for a HELOC or home equity loan, but you do need to earn enough to meet the DTI ratio requirement for the amount of money you’re hoping to tap. You’ll also need to prove that you have income consistently coming in.
Be prepared to provide income verification information when you apply for your loan, such as W-2s and paystubs.
Understanding home equity loan rates
Home equity loan and HELOC rates change based on many factors and vary by lender.
Many lenders tie these rates to the prime rate, which is influenced by Federal Reserve policy. Since 2022, the Fed has been increasing rates to ease inflation, and HELOC and home equity loan rates have followed suit.
Generally, home equity loan rates tend to parallel mortgage rates, but run a few percentage points higher.
FAQ about HELOC and home equity loan requirements
- Personal loans: A personal loan is a lump sum of money with a fixed interest rate and fixed monthly payment. The repayment term can last from one to seven years. Although most personal loans are unsecured — meaning you don’t need to put up collateral to get one — there are also secured personal loans.
- Zero percent intro APR credit cards: When you use a zero percent intro APR credit card, you’ll avoid paying interest on purchases during an initial promotional period, often between six and 21 months. Just be sure to pay off the debt in full during the promotional period, or else you’ll be charged interest.
- Family loans: Family loans are simply loans from relatives. This can be a good option if a family member is willing to lend you money at no or low cost. Keep in mind, though: Not repaying the loan might harm your relationship with your relative.
A HELOC or home equity loan can be a good choice if you need money to pay for a home improvement project or consolidate high-interest debt. Since the loans are secured by your home, the interest rate is usually lower than the rates on unsecured credit, such as credit cards and personal loans. One major downside, though: If you default on the home equity loan, the lender can foreclose on your home.
No. You can typically borrow a maximum of 80 percent of your home’s equity.