HELOC and home equity loan requirements

Home equity loans and HELOCs let you access the value of your home’s equity to use for any purpose, including home improvements, a down payment on another property or debt consolidation. But you need sufficient equity built up and proof of income to qualify — and only borrowers with good credit get the lowest rates.

Qualifying for a HELOC vs. home equity loan

HELOCs and home equity loans both let you tap into your home’s equity and typically have the same eligibility requirements — although they work slightly differently.

Here are the key differences:

• HELOCs have variable interest rates, whereas home equity loans have fixed interest rates.
• HELOCs are a revolving line of credit. Home equity loans provide a lump sum payment.
• HELOCs typically offer a 10-year draw period and 20-year repayment period. Home equity loans have repayment periods ranging from five to 30 years.
• HELOCs may offer both interest-only and principal and interest payments. Home equity loans require principal and interest payments.
• HELOCs may let you draw as little as $100 on your line up front. But home equity loans require you to take the full amount of your loan at closing.

8 requirements to get a HELOC or home equity loan

While lender requirements vary, prepare to meet these general requirements to get approved for HELOC:

1. Sufficient equity in the property
2. A combined loan-to value (CLTV) ratio of 80% or less
3. A good credit score
4. A low debt-to-income ratio (DTI)
5. Regular income history
6. Documentation
7. Proof of residency
8. A property appraisal

1. Sufficient equity in your property

To qualify for a HELOC, you need a specific amount of equity in your home. Equity is defined as the difference between what you owe on your mortgage — if you have one — and your home’s market value.

While many sources cite 15% to 20% equity as the minimum equity you need, be aware that once your HELOC is included in your debt, it will drive your home’s equity down and your LTV up.

2. A CLTV of 80% or less

The amount of your outstanding mortgage, if you have one, plus your HELOC can’t exceed a set ratio. In the lending industry, this ratio is known as the combined loan-to-value (CLTV) ratio. Lenders are generally willing to approve HELOCs at 80% CLTV or less, depending on your creditworthiness and income. Calculate your CLTV using this formula:

CLTV = (Current mortgage balance + HELOC line amount) ÷ Home’s appraised value

For example:

Current mortgage balance: $350,000
HELOC line amount: $50,000
Home’s appraised value: $500,000

LTV = ($350,000 + $50,000) ÷ $500,000 = .8 or 80% LTV

In this example, your current mortgage plus HELOC line comes in at exactly 80% CLTV, which means you could potentially get approved for a $50,000 HELOC if your credit and finances are in order and you don’t have any other debt.

3. A good credit score

When it comes to credit scores, most lenders require that you have a minimum credit score of 620 to qualify, but the best rates are available for borrowers with scores of 740 and up. Some companies will work with lower credit scores if you can provide evidence of extenuating circumstances and proof of current income. But if your credit score is low, prepare pay a higher interest rate.

4. Low debt-to-income ratio (DTI)

Your current debt level carries a lot of weight with lenders when determining if you qualify for a HELOC. To calculate your DTI, divide the sum of your monthly debt payments by your gross monthly income. Most lenders like to see a debt-to-income (DTI) ratio of 43% or less before approving a HELOC — and the lower, the better. Calculate your DTI using this formula:

DTI = Current monthly debt payments ÷ Gross monthly income

For example:

Current monthly debt payments: $1,500
Gross monthly income: $5,000

DTI = $1,500 ÷ $5,000 = .3 or 30%

If the lender determines that you have too much debt compared to your income — also taking into account your HELOC — you may be denied a loan. To increase your chances of being approved for a HELOC, pay down as much debt as possible before applying.

5. Your income history

Your income plays a big role in getting approved for HELOC. Regardless of how much equity you have, you’re still required to prove that you have sufficient income to service the new debt you’ll take on.

Prepare to provide:

• Two years’ personal and business tax returns.
• Bank statements for the past two months.

If you’re self-employed or own a business, the lender will also ask for:

• Profit and loss (P&L) statements for the past six months.
• Corporate tax returns for the past two years.

Once your application goes to the underwriting department, you may be asked for more detail regarding your finances and income sources. If that doesn’t appeal to you, some fintech lenders, like Figure, offer more streamlined, technology-driven processes and much faster-than-industry-average turnarounds on HELOC applications.

6. Documentation

Have the following documents ready when you apply:

• Driver’s license or government-issued photo ID
• Social Security number for you and your coborrower, if applicable
• The property’s estimated value
• Your current mortgage balance
• Homeowners insurance declaration page
• Your property tax bill
• Deed to the home

7. Proof of residency

If you’re looking to get a HELOC on a primary residence, the lender will likely ask for proof that you’ve lived in the home for a specific time as determined by the lender.

This may include:

• Utility bills sent to the address.
• Tax returns and property tax bill sent to the address.
• State car registration and a state driver’s license.

However, not all lenders require this. Some will accept a recorded deed showing your name on it and your insurance declaration page. My experience shows that proof of residency requirements vary widely by lender, so if one lender won’t work with you, keep calling around to find one with more flexibility.

And while not all lenders offer HELOCs on second homes, similar guidelines apply to second homes and investment properties. The lender will need proof that the property is being used in the way you declared it in your HELOC application. For example, you may need to provide lease agreements and proof of rental income, among other documents.

8. Property appraisal

Before approving your HELOC, the lender will need to perform a property appraisal. This shouldn’t cost you anything since it’s done to protect the lender.

But you need to schedule the appraisal, let the appraiser view the property or access your — or your tenant’s — home. And if it’s a vacation home in another state, you may need to find someone to let the appraiser into the house.

Bad credit home equity loans

While some lenders are willing to extend HELOCs and home equity loans to borrowers with less than stellar credit, the interest rates charged will be much higher than for someone with good or excellent credit. For example, if your credit score is around 620, you might end up paying over 11% APR for a HELOC vs. only 5% APR if you have a score above 740.*

For more information on how you can qualify for a home equity loan with lower credit, see our bad credit home equity loan guide.

How much am I eligible to borrow?

How much you’re eligible to borrow depends on:

• How much equity you have.
• The HELOC’s LTV limit.
• Your annual income.

To get a HELOC, you need sufficient equity, so keep in mind that your home’s equity will be reduced when you get a HELOC. For example, if your home is worth $500,000 and you currently have a $400,000 mortgage, it appears you have 20% equity ($400,000 ÷ $500,000 = .2 or 20%).

But if you try to get a $75,000 HELOC, it may not work because it will increase your debt to $475,000 — pushing your equity down to 5% and your LTV up to 95% — beyond what many lenders will allow unless you can prove your creditworthiness. To see what you might qualify for, see our HELOC calculator page.

And regardless of how much equity you have, you still have to meet specific income requirements to get a HELOC. In general, the higher your requested HELOC amount, the higher your annual income must be. For information on income requirements for a specific HELOC product, contact the lender.

When to get a HELOC

HELOCs are best for people who don’t need to borrow a big chunk all at once — like with a home equity loan or cash-out refinance — and want to access their home’s equity with a credit line offering greater payment flexibility, including interest-only payments during the draw period.

You may want to consider a HELOC if you:

• Have at least 15% to 20% equity in your property.
• Can get a better rate on a HELOC than on a personal loan.
• Don’t mind paying a variable interest rate.
• Are able to pay back the loan after the draw period ends.
• Don’t want to pay closing costs.
• Live in your primary residence.

Remember that if you have a primary mortgage, you’ll make payments on both your mortgage and HELOC. Make sure you have sufficient income to make both payments at the same time. Learn more about HELOCs and how they work.

When to get a home equity loan

Home equity loans are best for people who want to borrow a lump sum and pay back the loan with predictable, even monthly payments at a fixed interest rate. They’re best for people who want a large sum up front instead of a credit line to tap into.

You may want to consider a home equity loan if you:

• Prefer paying a fixed interest rate.
• Want predictability in your monthly payments.
• Have at least 15% to 20% equity in your property.
• Can get a better rate on a home equity loan than with a mortgage refinance.
• Want to pay back the loan over a fixed period.
• Live in your primary residence.

Remember that if you have a primary mortgage, you’ll make payments on both your mortgage and home equity loan. Make sure you have sufficient income to make both payments at the same time. Learn more about how home equity loans work.

Compare interest rates for home equity loans, HELOCs and cash-out refinancing

Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan, HELOC or Cash-Out Refinance.

If you selected a home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.

In the Cash-Out Refinance tab, select Refinance and enter your ZIP code, credit score and other property details to see what you might qualify for.

HELOC and home equity loan alternatives

HELOCs and home equity loans aren’t the only options for accessing cash. If you don’t have enough equity built up to get a home equity loan or prefer to refinance your home to get a lower rate, you want to consider these alternatives instead.

• Cash-out refinance. If your home has increased in value, this option lets you replace your existing mortgage with one for a higher amount. The benefit is that you can potentially lower your interest rate at the same time, although you will likely pay closing costs.
• Personal loans. While usually charging higher interest than home equity loans, personal loan amounts start lower than home equity loans — often at around $1,000 — and can go up to $50,000 or even $100,000 with digital lenders like SoFi or Lightstream.
• Credit cards. These can be a good choice for small, ongoing expenses, and they don’t require the extensive credit and income checks of a home equity loan. A card with a 0% APR introductory rate can help you save on interest.

For more financing alternatives, compare personal loans options for every credit score and cash-out refinance providers who may be able to help you secure a lower rate.

Bottom line

HELOCs and home equity loans are two ways to access your home’s equity for a range of purposes, including home repairs and debt consolidation. But you need to have a good credit score to get the best rate and proof of income to qualify. And the savings on closing costs and other fees may make it a good alternative to mortgage refinancing if you can secure a low rate.