Why are HELOC requirements important to understand? A HELOC—or home equity line of credit—can be valuable for many homeowners.
With this handy financial tool, you can borrow against the equity in your home for various financial needs.
What sort of needs? Because HELOCs are very flexible, they can be used for various purposes, such as:
- Home improvements
- Debt consolidation
- Education expenses
- Emergency funds
However, qualifying for one involves meeting certain HELOC requirements set by lenders.
In this article, we’ll explore the key HELOC requirements you need to know to take advantage of this option.
What is home equity, anyway?
Before diving into the specific requirements for a HELOC, it’s essential to understand what home equity is.
The basic concept of home equity is pretty straightforward: it’s the portion of your home that you actually own.
Calculating your home equity is fairly easy. First, check the amount you currently own on your mortgage, then subtract your home’s current market value.
- Example: Say your home is worth $400,000, and you owe $250,000 on your mortgage. In this case, you then have $150,000 in equity.
Using different loan or mortgage products like HELOCs, you can’ tap’ this equity to pay for various needs and expenses.
However, your first step should be to check if you meet the core requirements for a HELOC.
Key HELOC requirements
To qualify for a HELOC, lenders typically consider several factors that indicate one’s ability to repay the loan.
These requirements include:
- Sufficient home equity
- A good credit (FICO) score
- Stable income
- A low debt-to-income ratio
Let’s explore each of these requirements in more detail.
Sufficient home equity
It will be very difficult for you to qualify for a HELOC if you don’t have enough equity in your home. Luckily, it may not be as much as you might think.
Most lenders require at least 15-20% equity in your home to qualify for a HELOC. To start, use the calculation method we mentioned above to determine your equity amount.
In that example, the person has $150,000 equity in their $400,000 home, totaling 37.5% ($150,000 divided by $400,000). This borrower is well above the average minimum HELOC requirement.
Good credit score
Credit scores are a significant factor in determining someone’s eligibility for a HELOC—lenders use them to assess creditworthiness and a borrower’s ability to repay the loan.
- A credit score of 640 or higher is typically required for the average HELOC lender.
- Higher scores may get you better terms and a lower interest rate.
- Have a credit score lower than 640? You may still be able to qualify, but you might be offered a higher interest rate and less favorable terms. Check with your preferred lender to learn more.
Before applying for a HELOC, it’s essential to check your credit report and address any discrepancies or outstanding debts.
Stable income
Every lender wants to ensure a potential borrower has a reliable source of income to make HELOC payments.
For you, this means providing proof of stable income, such as:
- Tax returns
- Pay stubs
- W-2 forms
Are you self-employed? If yes, then additional documentation might be necessary, such as:
- Profit and loss statements
- Other documents that might demonstrate your income stability
No matter how you make money, a consistent work history and steady income will increase the odds of qualifying for a HELOC.
Low debt-to-income ratio
Your debt-to-income ratio (or DTI ratio) is another core factor a HELOC lender will consider.
DTI ratios are calculated by dividing the sum of your total monthly debt payments by your monthly income before taxes.
Most lenders requirea DTI ratio of 43% or lower—though some may allow higher ratios depending on other factors, such as your credit score and income.
Lower DTI ratios indicate applicants have sufficient income to manage their existing debts and still take on the additional debt of a HELOC.
Additional HELOC requirements
In addition to the primary requirements mentioned above, lenders may consider other factors and considerations when evaluating your HELOC application.
Property appraisal
Lenders typically require a property appraisal to determine your home’s current market value as part of the HELOC application process.
This helps the lender assess how much equity you have in your home and whether it meets the required threshold for a HELOC.
The appraisal process involves a professional appraiser possibly visiting your home, inspecting its condition, and comparing it to similar properties in the area to determine its value.
Loan-to-value ratio
The loan-to-value (LTV) ratio is another important metric that lenders use to evaluate your HELOC application.
You can calculate LTV by dividing the total amount of your mortgage plus the desired HELOC amount by your home’s appraised value
Most lenders prefer an LTV ratio of 80% or lower, meaning you should have at least 20% equity in your home
Example: If your home is appraised at $400,000, the combined amount of your mortgage and HELOC should not exceed $320,000.
Homeowner’s insurance
Lenders typically require you to have a valid homeowner’s insurance policy in place before approving a HELOC.
This insurance protects both you and the lender in case of damage to your home. Policies should be up-to-date and provide adequate coverage for your property’s value.
Financial reserves
Some lenders require you to have financial reserves, such as savings or investments, 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.
HELOC requirements: Conclusion
Understanding the common requirements for a HELOC is the first step toward leveraging your home’s equity to meet your most pressing financial needs or aspirational goals
Once you have a good idea of the basic requirements for a home equity line of credit, you can take the next step toward accessing that equity.
HomeEQ for fast, efficient home equity solutions
At HomeEQ, we are committed to helping you navigate the HELOC application process with ease and confidence.
Our competitive rates, and fast online application make unlocking your home’s potential simple.
Start your HELOC journey today with HomeEQ and take the next step toward leveraging your home equity for a better future.