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Home Equity Loan Requirements: Everything You Need to Know

Mai Browne Updated: August 29, 2023 • 10 min read
home equity loan

Home equity loans can be an attractive option for homeowners who want to borrow money using their home equity as collateral. With a home equity loan, you can access a lump sum of cash to use for a variety of purposes, such as home renovations or debt consolidation. It's important to understand home equity loan requirements before applying, so you can determine if you qualify and what steps you need to take to meet them. Knowing the requirements upfront can help you determine whether a home equity loan is a good option for you and what you need to do to qualify.

Key Requirements for a Home Equity Loan

If you're looking into how to get a home equity loan, bear in mind that requirements vary between lenders but typically include the following:

  • Good credit score: A good credit score tells lenders that you’re financially responsible and more likely to repay the loan.
  • Adequate income: Sufficient income is essential to meet monthly loan repayments. Most lenders require proof of income, such as tax returns or pay stubs, to determine eligibility.
  • Income history of at least two years: Pay stubs and tax returns provide proof of steady income. If you are self-employed, lenders make ask you to provide a profit and loss statement.
  • Low debt-to-income ratio (DTI): A DTI shows that you can manage your finances and repay the loan.
  • At least 15-20% equity in your home: Lenders require that you have a minimum equity in your home. Equity is the difference between your home's current value and the outstanding mortgage balance.
  • Loan-to-value (LTV) ratio: The LTV ratio represents the amount of debt compared to the value of the home. A lower ratio indicates lower risk to the lender, so it's best if it’s below 80%.

What's a Good Credit Score for a Home Equity Loan?

As you research what is needed for a home equity loan, note that your credit score is a major component. It allows lenders to quickly assess how well you manage credit.

While credit requirements can vary, a good credit score is generally considered to be 620 or higher. To qualify for the best interest rates and terms, you'll typically need a score of 700 or higher. If your credit score is lower than you'd like, here are steps you can take to improve it:

  • Examine your credit reports: Check your credit report regularly for errors and fraudulent activity. Alert the credit bureaus of any errors and infractions and have them removed.
  • Catch up on outstanding bills: Your payment history is a key determinant of your credit score. Missed or late payments could damage your score for years. Consider setting up automatic payments or reminder alerts to help you pay your bills in full every month.
  • Don’t close credit cards: As long as you’re using them and there are no annual fees, keep your credit cards open. Closing them could remove your available credit on those accounts and affect your credit utilization rate. It’s important to have an adequate amount of available credit. Lenders like to see that you have a long credit history with a credit card, too.
  • Use diverse types of credit: Maintain various types of accounts in your name such as credit cards, student loans and personal loans. Your credit score is affected by how you manage different types of credit.

The Minimum Income Requirements for a Home Equity Loan

In addition to a good credit score, the requirements for a home equity loan include showing that you have a stable income to repay it. Lenders typically require a minimum income of at least $50,000 per year, although this can vary. Some lenders may require that you have been employed for a certain period, such as two years.

Lenders will ask for these documents as proof of income:

  • Pay stubs
  • Tax returns
  • W-2s or 1099s
  • Bank statements
  • Investment account statements or rental income documentation.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is another key factor lenders consider when evaluating eligibility for a home equity loan. This ratio compares your monthly debt payments to your monthly income. Ideally, your DTI should be below 43%, although some lenders allow a higher DTI.

To calculate your DTI, add up all of your monthly debt payments, including your mortgage payment, credit card payments, car loans, and any other debt payments, and divide that number by your gross monthly income.

If your DTI is too high, here’s how you can decrease it:

  • Lower your interest rates: You may be able to find strategies to lower the amount of interest you pay on some of your obligations. Debt refinancing is one of the most popular strategies for qualified borrowers to lower their interest rates on mortgages and other loans.
  • Pay off debt: Pay off as much of your current debt as you can.
  • Increase your monthly income: Finding an additional income source would lower your DTI ratio.

Loan-to-Value Ratio

Your loan-to-value (LTV) ratio is another key factor lenders consider when evaluating eligibility for a home equity loan. This ratio compares the amount you want to borrow to the appraised value of your home. Lenders prefer a loan-to-value ratio of 80% or less, although some will lend up to 90% of the appraised value of your home. Keep in mind that the higher your LTV ratio, the more risk you pose to the lender, and the more expensive your loan will be.

To calculate your LTV ratio, follow these simple steps:

  • Determine the appraised value of your property.
  • Determine the outstanding balance of your loan.
  • Divide the outstanding balance of your loan by the appraised value of the property.
  • Multiply the result by 100 to get the percentage.

If the appraised value of your home is $300,000, and your mortgage balance is $225,000, your LTV ratio would be calculated as follows:

  • $225,000  ÷ $300,000  = 0.75 or 75%


Step-by-Step Guide: How to Apply for a Home Equity Loan

  • Determine how much you want to borrow.
  • Apply for the loan: Fill out the application and provide the necessary documentation.
  • Submit to underwriting: The lender will evaluate your application and order an appraisal of your home to determine its current value and whether you’re a good candidate for the loan.
  • Close: If you're approved, you'll go through the closing process, where you'll sign the loan documents and receive the funds.

How to improve your chances of getting approved?

  • Maintain a good credit score and history. Pay your bills on time. Keep credit utilization low and avoid applying for too many new credit accounts.
  • Create a clear and detailed plan for how you will use the funds. This will show that you are responsible and have a sold understanding of your financial needs.
  • Make sure you have enough equity in your home to qualify for the loan.
  • Make sure you have a steady income and a stable employment history.

Finding the Right Lender: How to Research Home Equity Loan Providers

Researching home equity loan providers is essential to finding the right lender for your financial situation. Consider interest rates, fees, loan terms, and customer service. Comparing several lenders will help you find the best home equity loan deal. Here are some ways you can search for home equity loan lenders:

  • Banks and Credit Unions. Check with local banks and credit unions to see if they offer home equity loans.
  • Online lenders: Online lenders have become increasingly popular and offer the convenience of applying for a home equity loan from the comfort of your home. There are several online lenders that offer home equity loans, and you can easily compare their rates and terms online.
  • Mortgage Brokers: Mortgage brokers can help you find lenders. They work with multiple lenders and can help you compare rates and fees to find the best home equity loan for your needs.

The interest rate on your loan can have a significant impact on your monthly payments, so it's important to shop around and find a lender that offers competitive rates.

Gather These Documents to Apply for a Home Equity Loan

  • First, do your research: Before applying, review the lender's requirements for documentation carefully. Each lender may have different requirements, so it is important to understand what documents you will need to provide.
  • Income and Savings Documentation: Provide financial documentation that shows your income and expenses. These include recent pay stubs, tax returns and bank statements.
  • Property information: Provide information about your property, including the address, property type, and the estimated value of the property. You may also need to provide a copy of your property tax bill.
  • Loan information: If you have an existing mortgage on the property, you will need to provide details about the loan, including the outstanding balance and monthly payments.
  • Personal identification: Personal identification documents include a driver's license, passport, or other government-issued identification.
  • Organize your documents: Organize your documents in a folder or binder, so you can easily provide them to the lender. Make sure all documents are up-to-date and that you have copies of all documents for your own records.

What to Expect When Applying for a Home Equity Loan

  1. Research potential lenders: It's important to research potential lenders to find one that offers favorable loan terms and has a good reputation.
  2. Prepare your application: Gather all necessary documents, such as financial statements, property information, and identification documents. Complete the application carefully and accurately.
  3. Submit your application: You can submit your application online, in-person, or by mail. Some lenders may require you to submit your application in person or by mail.
  4. Wait for approval: The lender will review your application and may ask for additional information. You can expect the process to take a few days to several weeks.
  5. Close: Once your application is approved, the lender will provide you with a loan estimate and closing disclosure. Be prepared to pay closing costs, which can range from 2% to 5% of the loan amount. Review these documents carefully and ask any questions you may have. Once you're ready, you'll sign the loan documents and receive the funds.

HELOC Requirements: What You Need to Know Before Applying

A home equity line of credit (HELOC) is another type of loan that allows you to borrow against the equity in your home. HELOCs have different requirements than home equity loans. You'll typically need a credit score of at least 620, and your debt-to-income ratio should be below 43%. The amount you can borrow will depend on your home's value, your equity, and other factors.

Unlike a traditional home equity loan, with a HELOC you can borrow and repay funds as needed, up to your credit limit. Keep in mind that HELOCs have variable interest rates, which means your monthly payments can fluctuate. Before applying for a HELOC, research the lender's requirements and compare loan terms to find the best deal.

HELOC Eligibility: How Much Equity Do You Need to Qualify?

The amount of equity you need to qualify for a HELOC depends on the lender and your personal financial situation. Most lenders require homeowners to have at least 15% to 20% equity in their homes before they can qualify for a HELOC. To calculate how much equity you have:

  • Subtract the amount you owe on your mortgage from the current market value of your home.

If your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in available equity (and you have 60% equity in your home). However, lenders will typically only allow you to borrow up to 80% of your available equity, which in this case would be $160,000.

Lenders consider other factors when evaluating eligibility, such as your credit score, income, and employment history. Some require a minimum credit score or a certain DTI to qualify for a HELOC.

To ensure that you meet the eligibility requirements, it's wise to speak with a lender and review your financial situation carefully. By understanding the equity you have available and the other factors lenders consider, you can make an informed decision about whether a HELOC is the right financing option for you.

HELOC Repayment Terms: What You Need to Know About Interest Rates and More

When you take out a HELOC, you will need to repay the loan according to the lender's terms. The repayment terms may vary depending on the lender and other factors, but generally, HELOCs have a draw period and a repayment period.

During the draw period, which normally lasts 5-10 years, you can borrow funds from the HELOC as needed, up to your credit limit. You will usually only need to make interest-only payments during this period. After the draw period ends, you will enter the repayment period, which typically lasts 10-20 years. During this period, you will need to repay the principal and interest on the loan.

The interest rate on a HELOC is usually variable, meaning it can fluctuate over time. This can make it difficult to predict exactly how much your payments will be each month. It is important to understand the terms of your HELOC and how the interest rate may change over time before you apply.


If you’re looking into how to apply for a home equity loan or HELOC, it’s essential to understand the requirements and terms associated with these types of loans. By following the steps outlined here, you can increase your chances of getting approved for a home equity loan or HELOC that fits your needs. Shop around and compare offers from different lenders to ensure that you’re getting the best deal. By taking the time to research potential lenders, gather all necessary documents and carefully review loan terms and documents, you’re setting yourself up for a successful outcome.

Written by Mai Browne linkedin-icon

Mai Browne has 20+ years of experience working at and writing for Fortune 500 companies, financial services firms, and professional services firms, including three of the Big 4. She has also written for Money Magazine, The Journal of Accountancy, and other publications.