Who qualifies for a HELOC?
Qualifying for a home equity line of credit requires a steady income, a decent credit score (usually 680 or higher), and enough equity to borrow against. You can typically qualify if you have more than 20% equity in the home, meaning you owe less than 80% of its value on your current mortgage.
Many homeowners find HELOCs attractive. As second mortgages, they’re one of the least expensive ways to borrow. And, as lines of credit, HELOCs are highly flexible. You can borrow, repay, and re-borrow as often as you want up to your credit limit.
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Typical home equity line of credit requirements
Unlike standard mortgage programs (conforming loans or FHA loans, for example), HELOCs are not regulated by a central agency. That means each lender gets to set its own guidelines to qualify for a home equity line of credit. And some are stricter or more relaxed than others.
Below, we explore typical HELOC requirements. But remember that these rules are not set in stone. If you’re a little below the “normal” credit threshold, for instance, you might find a more lenient lender willing to approve you.
Typical HELOC requirements:
- Min. credit score 680
- Max. loan-to-value 85%
- Steady income and employment
- Debt-to-income ratio below 43%
HELOC rates and closing costs vary by lender, too. So it’s important to shop around not just for a lender that will approve you, but for one that has affordable pricing as well.
Minimum credit score for a HELOC
Most HELOC lenders want to see a minimum credit score of at least 680, although some will go as low as 620. Keep in mind that your FICO score directly impacts your interest rate. You’ll typically get the lowest HELOC rates with a score above 700.
Those with lower credit scores could pay appreciably higher interest rates. In addition, if your FICO score is in the low/mid 600 range, you might need to be a strong borrower in other respects to qualify for a HELOC. That could mean having a lower debt-to-income ratio (DTI) or borrowing a smaller portion of your equity.
Equity needed for a HELOC
To qualify for a home equity line of credit, you need enough home equity available that you can borrow from it while leaving a certain portion (usually 15%) untouched. That means you’d need more than 15-20% equity in the home to qualify. Lenders want you to keep at least some of the equity in your home as a financial cushion in case the loan defaults.
Many HELOC lenders allow you to borrow up to 85% of your home’s value when your primary mortgage and HELOC are combined. This is your “combined loan-to-value ratio” or “CLTV.”
For example, suppose your home’s value is $400,000 and you still owe $250,000 on your primary mortgage. This is how the basic HELOC calculation works out:
- Maximum CLTV is 85%
- 85% of $400,000 is $340,000 (the most you can borrow in total)
- Existing mortgage balance is $250,000
- $340,000 - $250,000 = $90,000
- Maximum HELOC amount = $90,000
Some lenders will let you borrow up to 90% of your home value using a HELOC, while others cap the maximum HELOC amount at 80 percent. So ask about lenders’ guidelines when shopping around for your loan.
Remember that your home equity is the amount by which your home’s appraised market value exceeds your current mortgage balance. You won’t know the amount for sure until an appraisal takes place. But you probably have a good enough idea of your home’s value for some back-of-an-envelope calculations. You can also check with Realtor.com and Redfin.com to see a current estimated value.
Income requirements for a HELOC
With a HELOC, as with any mortgage, the lender will verify your ability to comfortably afford monthly payments. Income plays a role in this, and you’ll need a steady, reliable income to qualify. But lenders don’t look at cash flow alone. They also factor in your current debts to determine how much disposable income you really have. This is known as your “debt-to-income ratio” or “DTI.”
DTI requirements for HELOCs vary widely by lender. Some want to see a DTI at or below 36% while others are happy with anything below 43 percent. A few go as high as 50 percent (though a high DTI could lead to increased rates).
To estimate your DTI, divide your ongoing monthly debts by your pre-tax monthly income. Debts include regular payments like credit card minimums, home loans, auto loans, child support, and alimony. For example, suppose your gross monthly income is $6,000. And your debt payments (including the new estimated HELOC payment) total $2,000. Your DTI would be 33 percent. ($2,000 ÷ $6,000 = 33.333%).
How long does it take to get approved for a HELOC?
It often takes two to six weeks to get a HELOC, from the time you apply to the time you receive funds. But closing times can vary widely from one lender to the next. It largely depends on how busy the lender is, how complicated your application is, and how quickly you turn in documents and respond to your lender’s requests.
If you get together all the documentation you’re going to need before you apply, you can upload it or mail it immediately. Then be ready to respond to queries or provide further documents instantly. The more responsive you are, the faster your loan can get approved.
Some lenders advertise fast turnarounds for HELOCs. And, if you need the money urgently, you may prefer to go with a lender promising quick closing times. But still try to shop around at least a little. You’ll regret it later if you accept a worse deal just because your money will arrive a week or two sooner.
Information needed for a home equity line of credit
A HELOC is a type of mortgage. When you apply for a HELOC, you can expect to need most of the same documentation you did when you got your original home loan. That includes:
- Identity: Name; current address and past ones over the last two years; government photo ID
- Employment: Latest paystub plus employers’ details going back two years
- Home value: You’ll estimate your home’s value on the initial application prior to the official appraisal (you can use Realtor.com and Redfin.com if you’re unsure)
- Current mortgage details: Provide your most recent loan statement. Your current loan balance and payment will help determine your HELOC eligibility and maximum loan amount
- Income: Last two years’ tax returns (W-2 for employees; 1040 for self-employed or commissioned)
- Asset statements: Latest statements for bank accounts, pension or retirement funds, and brokerage or other investment accounts
- Debts and liabilities: The lender will find most of your ongoing debts on your bank statement and credit report. You’ll also provide alimony or child-support orders, plus your divorce decree, if applicable
- Social Security letter: Award letter or proof of receipt if you receive a pension, disability benefits, or Social Security income
- Homeowner's insurance details: Current policy information from your insurer
You may also need to provide a letter of explanation to your HELOC lender if anything looks amiss on your loan application; for instance, if you have an employment gap or a past issue in your credit history. These requests are normal but be sure to respond as quickly as possible so it doesn’t delay the process.
Does a HELOC require an appraisal?
Lenders almost always require a new appraisal for a home equity line of credit. They need to know your home’s current market value so they can determine how much equity you have to borrow against. Keep in mind that the appraisal can work in your favor. Home values have risen over the last few years and that could mean you have even more equity than you guessed.
Some HELOC appraisals can be done wholly online. An appraiser may use Google Street View to identify your home and then find “comps” (comparable values of homes recently sold in your neighborhood) to come up with a value. If you think they got the valuation dramatically wrong, you may be able to appeal and get a full, old-fashioned, walk-through appraisal.
Some lenders still require a full walk-through appraisal. If you’re wondering what that will entail, you can learn more about home appraisals here.
Can you get turned down for a home equity line?
Yes; if you don’t meet a lender’s home equity line of credit requirements, it’s likely to decline your application. The most common reasons homeowners get turned down for a HELOC include:
- Credit score is too low
- Existing debts are too high
- Not enough equity built up for a HELOC
Keep in mind that the HELOC market is competitive and rules vary by lender. So if you think you should qualify but get turned down by the first lender you try, it’s worth trying again. You might get approved by a different company.
If you’re thinking of applying for a HELOC over the next few months, you can improve your loan approval chances by boosting your credit score or paying down debt (especially card balances) now.
Find out if you qualify for a HELOC
Thanks to rising home prices, homeowners have built equity at a rapid pace over the last few years. That means many borrowers will easily qualify for a HELOC.
If you’re ready to tap your home equity, reach out to a lender who can check your eligibility and tell you how much you can borrow.