Home equity loan and HELOC requirements you should know

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If you’re looking to renovate your home, cover sudden expenses, or pay your child’s school fees, home equity can help.

With a Home Equity Loan or Home Equity Line of Credit (HELOC), you can turn that equity into cash, using it to ease your financial burden or improve your property, among other things. Learn more about using a home equity loan or HELOC for your expenses below.

Requirements to tap the equity in your home

At least 15% of the equity in your home

When it comes to home equity loans and HELOCs, many lenders require you to have 15% of the equity in your home, although some may go higher. Wells Fargo, for example, requires at least 20%.

However, you won’t be able to tap all of that equity no matter how much you have. Your lender will set your borrowing limit based on your loan-to-value ratio (how much you still owe on the house relative to its market value). your LTV will be.

Typically, lenders want to see a combined LTV of no more than 85%. To calculate your LTV, as well as your interest, you will first need the value of your property. You might need a home appraisal for this, which typically costs around $ 400.

Once you know the value of your home, divide your loan balance by the value and multiply by 100. This is your LTV.

For your equity, you subtract the loan balance from the value of your home, then divide that number by the value of the home.

Here is an example :

  • Loan balance: $ 125,000
  • Home value: $ 275,000
  • LTV: 45.45% (125,000 / 275,000 x 100)
  • Equity: 54.54% (275,000 – 125,000 / 275,000)

Why is this important: Lenders use your principal and LTV to determine how much you can comfortably borrow and afford.

In the example above, with a home value of $ 275,000 and a maximum LTV of 85%, your two loans would have to total $ 233,750 or less (275,000 x 0.85) for you to qualify.

Credible makes it easy to find favorable mortgage rates. You can compare the prequalified rates of our partner lenders in the table below, all by filling out one simple form.

A debt-to-income ratio of around 43% or less

Your debt-to-income ratio (DTI) – or the percentage of your monthly income your debt is – will also play a role. Typically, lenders require a DTI of 43% or less.

To calculate your DTI, add up your monthly expenses, including your mortgage payments, student loan payments, regular bills, child support, and other debts, then divide them by your monthly income.

Here is an example :
  • Monthly debts / obligations: $ 1,800
  • Monthly income: $ 4,000
  • DTI: 45% (1,800 / 4,000)

Home equity loans offer less flexibility regarding DTI than HELOCs. In most cases, home equity loan borrowers must have an DTI of 43% or less to qualify. Some lenders are even more stringent, requiring DTIs as low as 36%.

With HELOCs, lenders have more latitude. They can go up to 50% DTI in some cases.

Why is this important: Lenders use your DTI to make sure you have the funds available to continue meeting your monthly obligations, as well as to cover your new loan payment.

Keep reading: HELOC vs. Home equity loan: how to decide

A credit score in the mid-600s – or higher

The exact credit score requirements vary by lender, but you typically need an average to high score of 600 to qualify for a home equity loan or HELOC. A high score (think 760 or more) usually makes the qualifying process the easiest and gives you access to the lowest interest rates.

If your score is 600 or less, you might have a hard time getting a home equity product, although it is not impossible. If you’re less risky in other areas – you have low LTV or DTI, for example – then you may still qualify. Just be sure to shop around and consider a number of lenders if you fall into this low score category.

Why is this important: Your credit score reflects your payment habits. The higher the score, the easier it will be to get a home equity loan and the better the rate you will get.

Learn more: Credit score needed to refinance your home

A history of paying your bills on time

Lenders will also pull your credit report and assess your payment history. They want to see that you pay your bills regularly and on time (this indicates that you will likely do the same with your home equity loan).

A history of irregular or late payments is a big red flag for a lender, even if your score is high enough. For this reason, it’s important to stay on top of your bills, especially in the months leading up to your loan application.

Why is this important: Being constantly behind on your payments indicates that you are an unreliable, high-risk borrower. This can mean not qualifying for a home equity loan or, at the very least, getting a high interest rate.

Want another way to leverage your home equity?

If you are not sure if you qualify for a home equity loan or HELOC, or if you are concerned that your interest rate is too high, refinancing with withdrawal is another option to explore. These have slightly less stringent requirements and generally come with lower interest rates than home equity loans or HELOCs, especially in today’s market.

Another benefit is that mortgage refinancing replaces your existing loan, so you’ll only make one monthly payment and potentially lower your interest rate in the process.

If you are considering refinancing with withdrawal, be sure to consult with as many lenders as possible. Credible makes it easy to find the best deal: you can view prequalified rates from our partner lenders in just three minutes.

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  • Prequalify in just 3 minutes

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Read more: Fixed rate HELOCs: a cross between HELOCs and home equity loans

About the Author

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority. His work has been published in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, etc.

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