Unsurprisingly, many homeowners are taking advantage of their home equity in this market. Home equity lines of credit (also called HELOCs for short) can be an excellent way to finance big expenses, such as:
- Home renovations
- Medical bills
- Education costs
However, qualifying for a HELOC involves meeting certain qualifying minimums.
Researching the most common home equity line of credit requirements can help you determine if a HELOC is the right option for you and how to prepare for the application process.
Let’s explore the common requirements for obtaining a HELOC and what you need to know to get started.
The basics of a home equity line of credit
HELOCs are revolving lines of credit secured by the borrower’s home.
A traditional loan, like a personal or home equity loan, means you receive a lump sum. But a HELOC allows you to borrow up to a certain limit and repay it over time—similar to how a credit card works
During the draw period—which typically lasts five to 10 years—you can borrow and repay funds as needed
After the draw period ends, the repayment period begins—usually lasting 10 to 20 years—during which you can no longer borrow additional funds and must repay any outstanding balance
Key requirements for obtaining a home equity line of credit
To qualify for a HELOC, lenders generally look for several key factors that indicate your ability to repay the loan.
Factors include sufficient home equity, a good credit score, a stable income, and a low debt-to-income ratio.
Let’s break down each of these requirements in more detail.
Sufficient home equity
One of the primary requirements for a HELOC is having enough equity in your home.
Check your home’s current market value and subtract the remaining balance of your mortgage: That’s your home equity.
Most HELOC lenders have a requirement that you possess at least 15-20% equity to qualify
Calculating your home equity is pretty straightforward. Look up your outstanding mortgage balance, then subtract the current market value for your home.
Example: Let’s say your home is currently worth $300,000, but you owe $200,000 on your mortgage—therefore, you have $100,000 in equity, about 33% of your home’s value.
Good credit score
Your credit score is a core factor in determining loan eligibility. Lenders look at your credit score to analyze your creditworthiness and ability to repay a HELOC loan.
A score of 640 or higher is frequently the minimum required to qualify for a HELOC, though this varies from lender to lender. Higher scores may help borrowers find better terms and rates.
Conversely, borrowers with credit scores lower than 640 who manage to qualify might face higher interest rates and less favorable terms.
It’s essential to check your credit report and address any discrepancies or outstanding debts before applying for a HELOC.
Stable income
One of the fundamental requirements for HELOC lenders is a reliable source of income—enough to make your HELOC payments and other debt obligations.
This means you’ll need to provide proof of stable income, such as:
- Pay stubs
- Tax returns
- W-2 forms
Self-employed applicants for HELOC
Are you self-employed? If yes, you may need additional documentation—such as profit and loss statements—to demonstrate your income stability.
No matter how you earn your income, a consistent work history and steady income will increase your chances of qualifying.
Low debt-to-income ratio
The debt-to-income (DTI) ratio is another core factor that lenders consider when evaluating your HELOC application.
- The DTI ratio: Take your total monthly debt payments and divide by your gross (before taxes are taken off) monthly income.
For most lenders, a DTI ratio of 43% or lower is the requirement, though some may accept higher ratios if your credit score and/or income can compensate for them.
Lower DTI ratios indicate that you have sufficient income to take on additional debt from a HELOC.
Additional requirements and considerations
In addition to the core factors mentioned above, other factors and considerations may come into play for lender home equity line of credit requirements.
Property appraisal
Lenders typically require a property appraisal to determine your home’s current market value as part of most HELOC application processes.
A professional property appraisal helps the lender assess the value of your home, your equity, and whether it meets the threshold for a HELOC.
The appraiser will visit your home in person, inspect its condition, and, in their report, compare it to similar properties in the area to determine its value.
Loan-to-value ratio
This is also an important metric for HELOC lenders—the loan-to-value (LTV) ratio.
- The LTV ratio: Take the total amount of your mortgage, add the desired HELOC amount, and divide by your home’s appraised value
Most lenders prefer an LTV ratio of 80% or lower. In other words, you should have at least 20% equity in your home.
For example, if your home is appraised at $300,000, the combined amount of your mortgage and HELOC should not exceed $240,000.
Homeowner’s insurance
Lenders typically require a valid homeowner’s insurance policy—with you as the beneficiary—before approving a HELOC.
This insurance protects both you and the lender in case of damage to your home. So, make sure your policy is up-to-date and provides adequate coverage for your property’s value.
Financial reserves
Financial reserves, such as savings or investments, may be required by some lenders to demonstrate your ability to cover HELOC payments in case of unexpected financial difficulties.
Having sufficient reserves can strengthen your application and increase your chances of approval.
HomeEQ has your HELOC solutions
The bottom line is that these are just the basic, most common requirements for a HELOC. They are essential to understand, but only the first step toward leveraging your home’s equity to achieve your financial goals.
Yes, having sufficient home equity, a good credit score, a stable income, and a low debt-to-income ratio can increase your chances of qualifying for a HELOC.
However, one of the best ways to understand if a HELOC is right for your goals is to connect with a trusted and experienced HELOC lender like HomeEQ.
Our simple, straightforward, online application form enables us to analyze your financial needs to best serve you.
Connect with HomeEQ. Let’s discover if a HELOC is the financing solution you need.