Home Equity Loan Requirements

Who qualifies for a home equity loan?

The most important home equity loan requirement is that you have enough equity built up to borrow against. The good news is that most U.S. homeowners are sitting on plenty of pent-up cash. According to CoreLogic, the average borrower gained $63,600 in home equity between 2021 and 2022 alone.

In addition to having sufficient equity, you’ll need to meet minimum credit score requirements and have a stable income to qualify for a home equity loan. These requirements are flexible from lender to lender and many homeowners can qualify.

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Typical home equity loan requirements

Most mortgages have to conform to rules set by either Fannie Mae and Freddie Mac or a government agency. But it’s not like that for home equity loans. Each lender gets to decide its own home equity loan requirements and they can vary considerably from one company to the next.

Below are typical home equity loan requirements that you’re likely to see from many banks and lenders. Some might be more lenient than others, but note that if your loan is borderline or considered a higher risk, you could pay higher interest rates and closing costs as a result.

Minimum home equity needed to qualify

Most lenders want you to retain 20% of your home’s value as a financial cushion. That means you can usually borrow up to 80% of your home’s value between your primary mortgage and second mortgage combined. In other words, you’ll need more than 20% equity to qualify for a home equity loan.

Here’s an example:

• Your home is worth $400,000
• Your existing mortgage balance is $200,000
• Your maximum combined loan amount is $320,000 (80% of $400,000)
• Your maximum home equity loan amount is $120,000 ($320,000 minus the existing loan balance)

Rember that your total equity is the difference between your home value and your primary loan amount. Even though you technically have $200,000 in home equity in this scenario, you can’t borrow the full sum because you must leave that 20% equity cushion untouched. Thus your maximum home equity loan amount is closer to $120,000.

You may be able to find lenders who will let you borrow more than 80% of your equity. But they’re relatively rare — more so than for home equity lines of credit (HELOCs). Also note that VA loan borrowers can often borrow up to 100% of their equity.

Home equity loan credit score requirements

For some lenders, a 650 FICO score is the cutoff for home equity loans. But many allow credit scores starting at 620. Below that, your search will become more challenging.

As with all loan types, the higher your credit score is, the cheaper your home equity loan should be. If your score is over 740, you’ll probably be offered the lowest interest rate available, all other things being equal. If it’s over 700, you’re almost certain to be approved and given a very attractive rate. If your score is in the high 600s, that won’t necessarily get your application declined. But you’ll likely pay a slightly higher rate.

Home equity loan income requirements

As with any type of home loan, you need a stable income and employment history to qualify for a home equity loan. Lenders want to know that you’ll be able to afford the ongoing monthly payments.

There’s no set formula for how much you have to earn to get approved for a home equity loan. However, your lender will look closely at your finances to make sure you can comfortably afford the payments on your new loan. To do that, it will calculate your debt-to-income ratio. The less you spend on monthly debts compared to your income, the more you can get approved to borrow on a home equity loan.

Debt-to-income ratio for a home equity loan

Your debt-to-income ratio (DTI) is the proportion of your gross (pre-tax) monthly income that goes toward regular monthly debt payments.

Your projected home equity loan payment will be added to your current mortgage and other debts when a lender calculates your DTI to see if you qualify. Lenders love to see DTIs below 36% and will often reward you with a better rate if yours is that low. But many will approve applications with DTIs up to 43 percent.

Payments that count toward your DTI include:

• Housing costs, including mortgage, property taxes, homeowners insurance, and homeowners association fees (if any)
• Your new home equity loan payment
• Debt payments, including minimum payments on credit cards and standard monthly payments on your installment loans (personal, auto, student loans, etc.)
• Child support and alimony plus any other court-ordered payments

Your DTI does not include expenses that vary each month, such as food, utilities, gas, cellphone subscriptions, and so on.

You can calculate your DTI by adding up your monthly obligations, dividing those by your gross monthly income, and multiplying by 100. Here’s an example: Your monthly obligations add up to $1,500. And your pretax income is $4,000. $1,500 ÷ $4,000 = 0.375 x 100 = 37.5. Your DTI is 37.5 percent. The Consumer Financial Protection Bureau also has a DTI calculator you can use.

What information is needed for a home equity loan?

A home equity loan is a type of mortgage, and you can expect a similar application process to when you took out your original mortgage. You’ll be asked to show standard financial documentation, including:

• Your latest two pay stubs
• Current statement for your existing mortgage, showing mortgage balance and payments
• Tax documents for the last two years: W2s for employees or 1040s for self-employed and those who work on commission
• Current and most recent statements for your bank account(s), retirement plan(s), and investment account(s)
• Homeowners insurance statement
• Divorce decree, if applicable, plus any court orders for child support and alimony
• Award letter or proof of continuing receipt for any Social Security benefits and pensions you receive

If you have any dings on your credit report, you can also provide a letter of explanation saying why they occurred and reassuring the lender that you’ve recovered from past credit issues.

Can you be denied a home equity loan?

Unfortunately, some applicants are denied their home equity loans. Don’t panic if you’re one of them. Try to find a different lender that’s more sympathetic to your situation. Some are more flexible than others.

If your application is turned down, it’s likely to be because you don’t meet lenders’ home equity loan requirements in one of these areas:

• Available equity: You typically need more than 20% equity built up to qualify for a home equity loan or HELOC
• Credit score: Few lenders will approve you if your score is below 620. But plenty will approve you above that
• DTI: If your DTI, including the future home equity loan payment, is above 43%, you might have trouble getting approved

Those are typical home equity loan requirements. But this is a competitive marketplace. And you might be able to find a lender that will help you if you don’t meet all three criteria.

Find out if you meet home equity loan requirements

If you meet basic thresholds for available equity, credit score, and DTI, there’s a very good chance you can get approved for a home equity loan. But you won’t know for sure until you apply with a lender.

Keep in mind that the mortgage marketplace is competitive. You can often find a lower interest rate and/or easier approval standards by shopping around. So don’t be shy about getting quotes from multiple home equity loan lenders and comparing their offers.

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