A guide to home equity loan requirements

If you're a homeowner looking to access cash for major expenses like renovations, debt consolidation, or education costs, a home equity loan can be a smart solution. But before you apply, it’s important to understand the requirements you’ll need to meet to qualify.

In this guide, we’ll walk you through the key home equity loan requirements. That way, you can decide for yourself whether a home equity loan or one of the other lending options mentioned is best for you.

How a home equity loan works

A home equity loan allows homeowners to borrow a lump sum of money by tapping into the equity they’ve built in their property. Equity is the difference between the home’s current market value and any debts tied to the property.

With a home equity loan, the borrower receives the funds upfront and repays the loan over a fixed term, typically with a fixed interest rate. This makes monthly payments predictable, similar to a traditional mortgage.

The loan is secured by the home itself, meaning the lender can foreclose if the borrower fails to make payments.

Home equity loan requirements

Requirements for home equity loans vary by lender, however, you generally need:

Sufficient home equity

One of the most important factors lenders consider when you apply for a home equity loan is your equity and loan-to-value (LTV) ratio. This is the ratio of your combined home loans, like your mortgage plus a home equity loan, in relation to the current value of the property. Most lenders prefer homeowners to have an LTV of 80% to 85%, though some will offer home equity loans with LTVs as high as 95%.

To give an example, if your home is appraised for $475,000, you owe $300,000 on it, and you want to take out a $50,000 home equity loan, you would calculate your LTV like this.

• Step 1: Calculate your combined home loans: $300,000 mortgage + $50,000 home equity loan = $350,000.
• Step 2: Divide your combined home loans by the current value of your property: $350,000/$475,000 = 0.737.
• Step 3: Turn your answer into a percentage: 0.737 x 100 = 73.7%

In this example, an LTV of 73.7% is an acceptable qualification for most lenders, provided you meet other qualifications.

A good credit score

Typically, you will need at least a 660 or better credit score to qualify for a home equity loan. However, some lenders will work with you if you're stronger in other areas. Keep in mind, though, that the better your credit score is, the more likely you’ll get the best home equity loan rates.

Low DTI

Your debt-to-income (DTI) ratio is a percentage that represents your monthly debt payments divided by your monthly household gross income. So, if you have $1,500 in debt payments and a $6,000 gross monthly income, your DTI is 25%. Typically, lenders prefer you to have a DTI ratio of 43% or less.

Stable employment

Lenders like to see that you have a steady employment history and are capable of repaying the loan. You'll need to provide proof of income. Be prepared to show pay stubs and tax returns as part of your application.

A property in good condition

Lenders want to make sure the home backing your loan is in good shape. A well-maintained property helps protect their investment—and yours, too. Things like a solid roof, working systems (like plumbing and electrical), and no major damage or safety issues all matter. If your home is in good condition, you’re more likely to get approved.

Prepare your property with a comprehensive appraisal checklist.

How to get a home equity loan

• Check how much equity you have in your home by subtracting your mortgage balance from your home’s current market value.
• Review your credit score and financial history to make sure you meet lender requirements.
• Research different lenders to compare interest rates, fees, and loan terms.
• Gather necessary documents, such as proof of income, tax returns, and information about your mortgage.
• Submit a loan application with your chosen lender, including details about your home and finances.
• Allow time for the lender to appraise your home to confirm its current value.
• Wait for loan approval and review the terms carefully before signing.
• Receive the loan funds in a lump sum and begin making monthly payments based on your repayment schedule.

Pros and cons of home equity loans

Here are some benefits and drawbacks to getting a home equity loan.

Pros

• Lower interest rates compared to credit cards.
• High loan amounts offered as a lump sum payout.
• Predictable monthly payments.
• Repayment terms can be five to 30 years.
• There's no restriction on how you can use the funds.
• Funds may be tax-deductible if used for home improvements.
• Builds credit if used responsibly.

Cons

• Adds another bill each month, reducing cash flow.
• It comes with closing costs and fees.
• The process can take two to four weeks.
• Increased DTI can make it hard to borrow in the future.
• You must re-apply if you want more funds (unlike a HELOC).
• Potential for an underwater mortgage.
• Risk of foreclosure if you miss payments.

Home equity loan alternatives

If you don’t think a home equity loan is right for you, here are some lending alternatives to consider.

• Home equity line of credit (HELOC): This works similarly to a credit card in that you can borrow money as needed up to a certain limit. However, it differs from a credit card because interest rates are typically lower, and your home is the collateral for the loan.
• Home equity investment (HEI): You get a lump sum payout in exchange for a share of the home's future appreciation. The benefits of an HEI are that there are no monthly payments, no need for perfect credit, and no income requirements. Homeowners can repay anytime during a flexible 30-year term when they sell, refinance, or use another source of funds.
• Cash out refinance: Allows you to take out a new mortgage and replace the one you currently have, pocketing the difference in cash. Payments are rolled into a single monthly mortgage payment; however, it’s only advantageous if you can secure an interest rate that’s lower than the one you currently have.
• Reverse mortgage: A reverse mortgage is a lending product specifically for homeowners aged 62 and up. It has specific requirements and often comes with fees, which can make it challenging when it comes time for your children or other heirs to inherit your house.
• 0% credit card: Sometimes credit cards offer a 0% introductory rate for a set period of time, like 12 to 18 months. If you have a specific project and know you can pay off your card before the interest rate increases, this can be a valid option for smaller purchases.
• Personal loan: A personal loan is similar to a home equity loan, but you do not have to use your house as collateral. However, because there is no collateral, personal loans often have higher interest rates than home equity loans.

Frequently asked questions

What disqualifies you from getting a home equity loan?

Typically, having a poor credit score, not enough home equity, or a DTI ratio that is too high are reasons you might be disqualified from getting approved for a home equity loan.

Is it hard to get a home equity loan?

If you have good credit, a stable income, and enough equity in your home, it’s straightforward to get a home equity loan. It’s more challenging for those with poor credit and limited equity.

What are the guidelines for a home equity loan?

There are several qualifications you need to meet to qualify for a home equity loan. Though it depends on the lender, typical guidelines include having a debt-to-income ratio of DTI 43% or less, 15-20% equity in your home, and a credit score above 660.

Final thoughts

A home equity loan is one option for people who need cash to consolidate debt, complete a home renovation, or fund something else. However, a significant drawback to using a home equity loan is losing your home if you can’t make payments. If you’re not interested in taking that risk, you do have alternatives to consider, like a home equity investment.