Home Equity Loan Requirements: How to Qualify | LendingTree (2024)

As a homeowner, it can feel like most of your net worth is tied up in your house. A home equity loan can help you free up some of that cash without the need to sell your house.

You must meet home equity loan requirements to qualify, however, which are often more strict than first mortgage requirements. If you’re deciding whether a home equity loan is right for you, let us walk you through what you need to know about qualifying for one.

The requirements for a home equity loan tend to be stricter than the requirements for a typical first mortgage. The exact rules will vary by lender, but there are three general guidelines that most lenders follow:

1. Debt-to-income ratio: 43% or less

Your debt-to-income (DTI) ratio measures the monthly debt payments you currently make compared to your monthly income. To calculate your DTI ratio, add up the monthly payments on the loans you have, then divide them by your monthly income before taxes.

For example, let’s say that each month you have a $400 student loan payment, a $300 car payment and an $1,800 mortgage payment. That means you have a debt load of $2,500 a month. Now let’s say you earn $6,250 per month. Your DTI ratio stands at 40%.

To qualify for a home equity loan, your DTI ratio will typically need to be below 43% once your potential new loan payment is factored in. You can lower your DTI ratio by paying off debt or increasing your income.

2. Credit score: At least 620

In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a home equity loan with bad credit.

Home Equity Loan Requirements: How to Qualify | LendingTree (1)

How to find your credit score

You can find out your credit score by contacting any of the three major credit bureaus. It’s free to get your score from Experian and Equifax, while TransUnion charges a small fee. However, it can be easier to use a third-party service, like LendingTree’s credit-monitoring tool, to access your credit score for free.

The biggest factor in your credit score is your payment history — so if you need to boost your credit score to qualify for a home equity loan, focus on making your payments on time, every time.

3. Home equity: At least 15%

You need to have a minimum amount of equity — at least 15% — to qualify for a home equity loan. Lenders often express this as a maximum 85% loan-to-value (LTV) ratio. The LTV ratio measures your outstanding mortgage balance against your home’s market value.

Ultimately, the more equity you have, the more money you can borrow. Home equity loans for borrowers with less than 10% equity (which would be an LTV ratio of 90% or higher) are sometimes called high-LTV loans and will likely come with a higher interest rate.

How does a home equity loan work?

The amount you’re able to borrow with a home equity loan is generally set by the amount of equity in your home. You can usually borrow up to 85% of your home’s value, minus your first mortgage balance.

How you get the money: You’ll receive the money in a single, lump sum.
How you make payments: You’ll immediately begin paying back the money with a monthly payment at a fixed interest rate.
What you’re risking: If you fail to make the payments on your home equity loan, you could lose your home to foreclosure.

Home Equity Loan Requirements: How to Qualify | LendingTree (2)

Home equity loan rates are typically higher than what you’ll find on either a 30-year fixed mortgage or a home equity line of credit (HELOC).

Interest rates have risen over the last year, but our expert’s mortgage rates forecast predicts a slow decline over the coming months — provided that inflation doesn’t climb and the job market remains strong enough to keep the unemployment rate relatively low. While home equity rates aren’t tied directly to the prime rate like HELOC rates are, they do tend to follow the broader rates environment.

Home Equity Loan Requirements: How to Qualify | LendingTree (3) See more about current home equity loan rates.

The best place to get a home equity loan

The best home equity loan is one with payments that fit in your budget, has a competitive rate and comes from a lender who will treat you right — but finding that loan isn’t always easy.

Comparison shopping with three to five lenders can save you thousands of dollars in the long run, according to a LendingTree study, so it’s well worth your time. But the only way to save yourself thousands of headaches is to also consider whether potential lenders will provide the experience you need — like sending texts to customer service, having an online application process or accessing a wide network of brick-and-mortar locations.

Home Equity Loan Requirements: How to Qualify | LendingTree (4)

Home Equity Loan Requirements: How to Qualify | LendingTree (5) Unsure where to start? Read our list of the best home equity loan companies.

ProsCons

Lower costs: You’ll spend less just to borrow the money compared to credit cards or personal loans

Fixed payments: You'll have fixed monthly payments for the entire loan term

Tax benefits: Your loan interest may be tax-deductible

Flexibility: You're not restricted in how you use the money

Interest rates: Your loan won't be directly affected by rising interest rates like HELOCs

Closing costs: You'll pay substantial closing costs ranging from 2% to 5% of your loan amount

Loss of equity: You’ll reduce your available equity as you raise your total debt

Foreclosure: You risk foreclosure if you default

Tough to qualify: You might have a tougher time qualifying for a home equity loan than your other loan options

Isn’t a line of credit: You’ll have less flexibility in how and when you can access funds compared to a HELOC

Home Equity Loan Requirements: How to Qualify | LendingTree (6)Learn more about the pros and cons of a home equity loan.

Should I get a home equity loan?

You should consider getting a home equity loan if:

Home Equity Loan Requirements: How to Qualify | LendingTree (7) You want to make home improvements.Home equity loans are commonly used to pay for costly home improvements like renovations and additions. If you use the loan to fix up your home, the interest you pay is usually tax-deductible.

Home Equity Loan Requirements: How to Qualify | LendingTree (8) You want to pay off higher-interest debt.Since home equity loans are secured by your home, they usually have lower interest rates than you’ll find on unsecured loans, such as credit cards or personal loans. You may be able to consolidate high-interest debt with your new home equity loan, leaving you with a lower interest rate and lower monthly payment.

Home Equity Loan Requirements: How to Qualify | LendingTree (9) You can afford your mortgage and other monthly expenses.Don’t take out a second mortgage if it’ll break your budget. A home equity loan adds another mandatory monthly payment to your finances, in addition to your existing mortgage payment and any other loan payments you’re responsible for.

Ready to get a home equity loan? Get started today by calculating how much you could borrow:

Home Equity Loan Requirements: How to Qualify | LendingTree (10)

Cash-out refinance

A cash-out refinance involves taking out a new mortgage that pays off and replaces your current mortgage, but with a higher amount than you currently owe: The difference will come to you as cash. You’ll also pay typical mortgage closing costs.

Advantage: Your interest rate is likely to be lower than what you’d get with a home equity loan, since a cash-out refi is a primary mortgage and not a second one.

Home Equity Loan Requirements: How to Qualify | LendingTree (11) See current refinancerates and top lenders today.

Home equity line of credit (HELOC)

A HELOC is another loan product based on your home’s equity, but allows you to withdraw funds over time, up to a set limit. Note, though, that HELOCs typically have variable interest rates, meaning your monthly payment is likely to change over the years while you’re paying it back.

Advantage: You’ll have low monthly payments during the initial draw period and can pay off and re-use the line of credit as much as you want during that time.

Home Equity Loan Requirements: How to Qualify | LendingTree (12)See current HELOC rates and top lenders today.

Reverse mortgage

With a typical mortgage, you make payments each month to pay back the loan. With a reverse mortgage, a lender pays you in a lump sum or on a monthly basis (or in some cases through a credit line) based on your home equity. The balance isn’t due until you leave the home or die. Reverse mortgages are exclusive to seniors age 62 or older and are often used to supplement retirement income. However, paying off a reverse mortgage often involves selling the home.

Advantage: You won’t have a monthly payment.

Personal loan

Personal loans are a type of installment loan, usually with a fixed interest rate. As with a home equity loan, you receive the proceeds of a personal loan as a lump sum. Personal loans are generally unsecured, meaning there’s no foreclosure risk — but you’ll likely pay a higher interest rate and can be sued if you default on the loan.

Advantage: You aren’t putting your home at risk.

Get Customized Personal Loan Rates

0% APR credit card

If you’re looking for a relatively short-term loan, a 0% APR credit card may be a good option. These credit cards charge zero interest for an introductory period, but the interest rate jumps back to a normal rate after that time. Credit limits will likely be lower than you’d be able to borrow with a home equity loan, though, and interest rates after the introductory period can be steep.

Advantage: You can avoid paying interest if you pay off your balance before the introductory period ends.

Home Equity Loan Requirements: How to Qualify | LendingTree (13)Read more about our picks for the best 0% APR credit cards.

CD-secured loan

If you have a significant sum invested in certificates of deposit (CDs) and hit an unexpected financial emergency, you may wish you could access those funds without having to pay early withdrawal fees. CD-secured loans are one way to access a lump sum without actually pulling your money out of the CD. You can usually get a loan for the full amount you’ve invested without paying a high interest rate.

Advantage: You’ll have a plan for emergencies that doesn’t require taking money out of your CDs early.

Balance transfer credit card

If you have strong credit but are carrying high-interest debt, a balance transfer credit card can consolidate your debt and give you a period of up to 21 months to pay down the principal balance without worrying about interest. You’ll usually have to pay a balance transfer fee, but if you can pay down your debt fast enough to match your interest-free introductory period, a balance transfer credit card could save you much of the pain of your high-interest debt.

Advantage: You can buy yourself enough time to significantly reduce high-interest debt without the added interest expense.

Home Equity Loan Requirements: How to Qualify | LendingTree (14)Read more about our picks for the best balance transfer credit cards.

Credit counseling

If you’re struggling to stay on top of your debts and expenses, a credit counselor can help. Beyond simply offering advice, credit counselors can assist you as you create and execute a debt management plan. During this process, the counselor may help you get discounts from your creditors on interest rates and fees, or lower your monthly payments.

Advantage: You’ll have help strategically attacking your debt.

Home Equity Loan Requirements: How to Qualify | LendingTree (2024)

FAQs

Home Equity Loan Requirements: How to Qualify | LendingTree? ›

High debt levels

In addition to your credit score, lenders evaluate your debt-to-income (DTI) ratio when applying for a home equity loan. If you already have a lot of outstanding debt compared to your income level, taking on a new monthly home equity loan payment may be too much based on the lender's criteria.

What disqualifies you from getting a home equity loan? ›

High debt levels

In addition to your credit score, lenders evaluate your debt-to-income (DTI) ratio when applying for a home equity loan. If you already have a lot of outstanding debt compared to your income level, taking on a new monthly home equity loan payment may be too much based on the lender's criteria.

Do people get denied home equity loans? ›

While a home equity loan can provide the funds you need, approval is not always guaranteed, even if you have a substantial amount of equity in your home.

Is it hard to get approved for home equity? ›

Some home equity lenders allow for FICO scores in the “fair” range (the lower 600s) as long as you meet other requirements around debt, equity and income. That's not to say it'll be easy: Lenders tend to be stringent, even more so than they are with mortgages. Still, it's not impossible.

Do you need to show income for a home equity loan? ›

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.

Why would I not qualify for a home equity loan? ›

620 credit score or higher: Most lenders require credit scores to be at or above 620 for applicants to qualify for home equity loans. Though there are some lenders that may offer loans to borrowers with sub-620 credit scores, your chances of approval typically diminish quickly as your score falls below this mark.

What verification is needed for a home equity loan? ›

A HELOC application requires you to verify your identity, income, assets, and property details. The typical documents you'll need to provide include: Proof of Income: This could be your recent pay stubs and W-2 forms, which reflect your earnings and employment stability.

Do I need an appraisal for a home equity loan? ›

Lenders require an appraisal for home equity loans to protect themselves from the risk of default. If a borrower can't make monthly payments over the long-term, the lender wants to know it can recoup the cost of the loan. An accurate appraisal protects borrowers too.

What is the lowest score for a home equity loan? ›

Generally, lenders require at least a 620 credit score to qualify for a home equity loan. If your score isn't quite there yet, though, you still have options.

What do banks look at for a home equity loan? ›

To qualify for a home equity loan, you'll need a FICO score of 660 or higher. U.S. Bank also looks at factors including: The amount of equity you have in your home. Your credit score and history.

What are the minimum requirements for a home equity loan? ›

They look for:
  • A credit score of at least 620: Borrowers with better credit scores usually get more attractive interest rates, but you may qualify even if your score is in the “good” range. ...
  • At least 20% equity in your home: Lenders want to see you have enough to borrow against without posing a risk.

What do they look at when applying for a home equity loan? ›

Qualification requirements for home equity loans will vary by lender, but here's an idea of what you'll likely need to get approved: Home equity of at least 15% to 20%. A credit score of 620 or higher. Debt-to-income ratio of 43% or lower.

How long is the approval process for a home equity loan? ›

Getting a home equity loan can take anywhere from two weeks to two months, depending on your preparation of documents (such as W2s and 1099 tax forms and proof of income), your financial situation, and state laws. The home equity loan process time varies from lender-to-lender.

When not to use a home equity loan? ›

Don't: Use it to Pay for Vacations, Basic Expenses, or Luxury Items. You have worked hard to create the equity you have in your home. Avoid using it on anything that doesn't help improve your financial position in the long run.

Do you need pay stubs for home equity loan? ›

To demonstrate your income to lenders, you'll need to provide documentation that shows you have the financial means to repay the loan, including your pay stubs, tax returns, bank statements, employment verification and other sources of income.

Can I get a home equity loan without proof of income? ›

It's possible to get a no-income verification HELOC without a full-time job as long as you have some form of cash flow. Not having a job isn't the same as not having an income. Many homeowners manage to pay off their mortgage loans consistently without steady employment.

Are there restrictions on what a home equity loan can be used for? ›

There are no limits on how you can use the money from a home equity loan. Since all the money is provided upfront, it is often used to pay for big projects like home renovations.

What credit score do I need for a home equity line? ›

Credit score: At least 620

In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases.

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