Home Equity Loan Requirements: What You’ll Need to Qualify
As a homeowner, it may feel like most of your net worth is tied up in your house. A home equity loan can help you free up some of that cash without selling your house. Home equity loan requirements tend to be stricter than the requirements for a typical first mortgage, though the exact rules will vary by lender.
There are three general home equity loan requirements that most lenders follow:
- Debt-to-income ratio: 43% or less
- Credit score: 620 or higher
- Home equity: 15% or more
1. Debt-to-income ratio: 43% or less
To qualify for a home equity loan, your DTI ratio will typically need to be below 43% once your potential new loan payment is factored in.
Your debt-to-income (DTI) ratio measures your monthly debt load compared to your monthly income. To calculate your DTI ratio, add up the monthly payments on the loans you have, then divide them by your monthly income before taxes.
For example, let’s say that each month you have a $400 student loan payment, a $300 car payment and an $1,800 mortgage payment. That means you have a debt load of $2,500 a month. Now let’s say you earn $6,250 per month. Your DTI ratio stands at 40%. If you then take out a home equity loan that comes with $160 monthly payments, your DTI will hit 43%.
2. Credit score: At least 620
In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a home equity loan with bad credit.
How to find your credit score
3. Home equity: At least 15%
You need to have a minimum amount of equity — at least 15% — to qualify for a home equity loan. Lenders often express this as a maximum 85% loan-to-value (LTV) ratio. The LTV ratio measures your outstanding mortgage balance against your home’s market value. Ultimately, the more equity you have, the more money you can borrow.
You can technically take out a home equity loan as soon as you reach 15% equity, so homeowners who make a hefty down payment could qualify within the first year. However, for many it can take five to 10 years to build up 15% equity.
How to get there: You can accelerate the process of building equity by:
How can you get a home equity loan with less than 15% equity?
Ready to find how much you could borrow? Use our home equity loan calculator today.How does a home equity loan work?
The amount you’re able to borrow with a home equity loan is generally set by the amount of equity in your home. You can usually borrow up to 85% of your home’s value, minus your first mortgage balance.
For example, let’s say your home is worth $300,000 and you still owe $100,000 on your first mortgage.
→ Calculate 85% of $300,000, which is $255,000.
→ Subtract your $100,000 balance from $255,000, and you end up with $155,000.
→ So, you can likely borrow up to $155,000 with a home equity loan.
Home equity loan rates and market trends
Home equity loan rates are typically higher than what you’ll find on either a 30-year fixed mortgage or a home equity line of credit (HELOC).
Interest rates have fallen by more than a full percentage point in the last 12 months, and our mortgage rates forecast predicts further decline over the remainder of 2024. While home equity rates aren’t tied directly to the prime rate like HELOC rates are, they do tend to follow the broader rates environment.
See current home equity loan rates.
The best place to get a home equity loan
The best home equity loan is one with payments that fit in your budget, a competitive interest rate and a lender who’ll treat you right — but finding that loan isn’t always easy.
→ Comparison shopping with three to five lenders can save you thousands of dollars in the long run, according to LendingTree data — so it’s well worth your time.
→ Also consider whether potential lenders will provide the experience you need — like the ability to exchange texts with customer service, submit an online application or access a network of brick-and-mortar locations.
Get started by reviewing our picks for the top home equity loan lenders below.
Compare offers from top home equity loan lenders
Should I get a home equity loan?
| Pros | Cons |
|---|---|
Lower costs: You’ll spend less to borrow the money compared to credit cards or personal loans Fixed payments: You'll have fixed monthly payments for the entire loan term Tax benefits: Your loan interest may be tax-deductible Flexibility: You're not restricted in how you use the money Interest rates: Your loan won't be directly affected by rising interest rates like HELOCs | Closing costs: You'll pay substantial closing costs ranging from 2% to 5% of your loan amount Loss of equity: You’ll reduce your available equity as you raise your total debt Foreclosure: You risk foreclosure if you default Tough to qualify: You might have a tougher time qualifying for a home equity loan than your other loan options It isn’t a credit line: You’ll have less flexibility in how and when you can access funds compared to a HELOC |
You should consider getting a home equity loan if:
→ You want to make home improvements
Home equity loans are commonly used to pay for costly home improvements like renovations and additions. If you use the loan to fix up your home, the interest you pay is usually tax-deductible.
→ You want to pay off high-interest debt
Since home equity loans are secured by your home, they usually have lower interest rates than you’ll find on unsecured loans, such as credit cards or personal loans. You may be able to consolidate high-interest debt with your new home equity loan, leaving you with a lower interest rate and lower monthly payment.
→ You can afford your mortgage and other monthly expenses
Don’t take out a second mortgage if it’ll break your budget. A home equity loan adds another mandatory monthly payment to your finances, in addition to your existing mortgage payment and any other loan payments you’re responsible for.
A home equity loan may be a bad idea if:
→ You don’t know exactly what you want to achieve with the funds
Using a home equity loan as a financial cushion or catch-all for unexpected expenses is risky. Not only are you putting your home at risk, the interest you pay likely won’t be tax-deductible.
→ You live in an area where home values are falling
Since home equity loans are secured by your home, they reduce your available home equity. If your home’s value falls, you could end up owing more on your mortgage than the home is worth (also known as being “underwater on your mortgage” or having negative equity).
Alternatives to home equity loans
There are many options you can consider besides a home equity loan:
Cash-out refinance
A cash-out refinance involves taking out a new mortgage that pays off and replaces your current mortgage, but with a higher amount than you currently owe. The amount over and above what you owe will come to you as cash. You’ll also pay typical mortgage closing costs.
Advantage: Your interest rate is likely to be lower than what you’d get with a home equity loan, since a cash-out refi is a primary mortgage and not a second one.
See current refinance rates and top lenders today.Home equity line of credit (HELOC)
A HELOC is another loan product based on your home’s equity, but allows you to withdraw funds over time, up to a set limit. Note, though, that HELOCs typically have variable interest rates, meaning your monthly payment is likely to change over the years while you’re paying it back.
Advantage: You’ll have low monthly payments during the initial draw period and can pay off and re-use the credit line as much as you want during that time.
See current HELOC rates and top lenders today.Reverse mortgage
With a typical mortgage, you make payments each month to pay back the loan. With a reverse mortgage, a lender pays you in a lump sum or on a monthly basis (or through a credit line, in some cases) based on your home equity. The balance isn’t due until you leave the home or die. Reverse mortgages are exclusive to seniors age 62 or older and are often used to supplement retirement income. However, paying off a reverse mortgage often involves selling the home.
Advantage: You won’t have a monthly payment and can remain in your home.
Personal loan
Personal loans are a type of installment loan, usually with a fixed interest rate. As with a home equity loan, you’ll receive your personal loan proceeds as a lump sum. Personal loans are generally unsecured, meaning there’s no foreclosure risk — but you’ll likely pay a higher interest rate and can be sued if you default on the loan.
Advantage: You aren’t putting your home at risk.
0% APR credit card
If you’re looking for a relatively short-term loan, a 0% APR credit card may be a good option. These credit cards charge zero interest for an introductory period, but the interest rate jumps back to a normal rate after that time. Credit limits will likely be lower than you’d be able to borrow with a home equity loan, though, and interest rates after the introductory period can be steep.
Advantage: You can avoid paying interest if you pay off your balance before the introductory period ends.
Read more about our picks for the best 0% APR credit cards.CD-secured loan
If you have a significant sum invested in certificates of deposit (CDs) and hit an unexpected financial emergency, you may wish you could access those funds without having to pay early withdrawal fees. CD-secured loans are one way to access a lump sum without actually pulling your money out of the CD. You can usually get a loan for the full amount you’ve invested without paying a high interest rate.
Advantage: You’ll have a plan for emergencies that doesn’t require taking money out of your CDs early.
Balance transfer credit card
If you have strong credit but are carrying high-interest debt, a balance transfer credit card can consolidate your debt and give you a period of up to 21 months to pay down the principal balance without worrying about interest. You’ll usually have to pay a balance transfer fee — but if you can pay down your debt fast enough to match your interest-free introductory period, a balance transfer credit card could save you much of the pain of your high-interest debt.
Advantage: You can buy yourself enough time to significantly reduce high-interest debt without the added interest expense.
Read more about our picks for the best balance transfer credit cards.Credit counseling
If you’re struggling to stay on top of your debts and expenses, a credit counselor can help. Beyond simply offering advice, credit counselors can assist you as you create and execute a debt management plan. During this process, the counselor may help you get discounts from your creditors on interest rates and fees, or lower your monthly payments.
Advantage: You’ll have help strategically attacking your debt.
Frequently asked questions
How much you can borrow depends on how much home equity you have, your credit score and other factors. A home equity loan calculator can help you estimate how much cash you’re likely to have access to through a home equity loan.
Every lender operates at its own speed, but the process to underwrite a home equity loan is similar to a standard mortgage. As such, you can expect it to take about the same amount of time. The average time to close on a home loan is 44 days.
Home equity loans are usually offered with loan terms that range from five to 30 years, but the loan term that’s right for you will largely be determined by the monthly payments. If you’re taking out a large amount, you may be able to afford a 30-year loan but be in over your head with a five- or 10-year loan.
To qualify for a home equity loan, you’ll typically need to document your ability to repay the loan. This includes earning enough income to make your monthly payments. If you don’t have a job, you’ll have to show that you have enough income from other sources to make your payments.