Home Equity Loan Requirements
To qualify for a home equity loan, you’ll need to meet three common guidelines:
- Debt-to-income ratio: 43% maximum
- Credit score: 620 or higher
- Home equity: 15% minimum
A home equity loan helps you tap into the equity you’ve built in your home while keeping your current mortgage in place. Home equity loan requirements are typically tougher than first mortgage requirements, but can be similar to home equity line of credit (HELOC) requirements.
Read on to discover what you’ll need to qualify and how to decide if an equity-tapping second mortgage is right for you.
1. Debt-to-income ratio: At most 43%
To qualify for a home equity loan, your debt-to-income (DTI) ratio usually needs to be below 43%.
Tip: Paying off debt or increasing your income can help you lower your DTI ratio.
Want to know your DTI ratio? Use LendingTree’s DTI calculator to find out today.
Your DTI ratio measures your monthly debt load compared to your monthly income. To calculate your DTI ratio, add up your monthly debt payments, 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 $2,500 monthly debt load. 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 nearly 43%.
2. Credit score: At least 620
Many lenders set a minimum 620 credit score, but if you shop around it may be possible to find lenders with minimums as high as 660 or 680. Look for lenders who specialize in home equity loans with bad credit.
Tip: If you need to improve your credit score to qualify for a home equity loan, focus on making on-time payments. Your payment history is a huge factor in your overall credit score.
Many people find it easiest to use a credit-monitoring service to find their credit score. LendingTree Spring is a free and secure way for you to track your credit score and get personalized advice to improve your credit.
It’s also free to request your credit score from any of the credit bureaus: Experian, Equifax and TransUnion.
3. Home equity: At least 15%
You typically need to have at least 15% to qualify for a home equity loan. Lenders express this as a maximum 85% loan-to-value (LTV) ratio. The LTV ratio shows what percentage of your home’s value your mortgage balance(s) represent.
Tip: Loans for borrowers with less than 15% equity (which would be an LTV ratio above 85%) do exist. If you need one, you’ll want to search for “high-LTV loans.” They’re usually more expensive (have higher interest rates) and more difficult to qualify for.
Curious much you could borrow? Use our home equity loan calculator today.
Here’s the LTV formula:
LTV ratio = Loan amount ÷ Home value
When you add your first mortgage and new home equity loan amounts together, this creates your combined LTV (CLTV), which lenders cap at 80% to 85%.
How much are home equity loan closing costs and fees?
Closing costs and fees on a home equity loan typically fall between 2% and 5% of the loan amount, but vary from lender to lender.
Home equity loan costs and fees usually include:
- An application fee when you apply for a home equity loan
- Origination fees
- Appraisal fees
- Title fees
- Prepayment penalties that can kick in if you pay off the loan early
While some lenders promote no-closing-cost loans, those costs are usually recouped elsewhere — often through a higher interest rate.
Shop around with the best home equity lenders to find one with competitive costs and fees.
Unlike a HELOC, you usually cannot extend a home equity loan. You do have the option to refinance a home equity loan, which can allow you to qualify for better terms or a larger loan amount.
Ultimately, if flexibility and the ability to re-draw funds over time is important to you, a HELOC probably makes more sense than a home equity loan. Because they’re paid out in a lump sum and repaid with equal monthly payments, home equity loans are better suited for a one-time need.
Check out our HELOC versus home equity loan guide.
Alternatives to home equity loans
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 refinance closing costs.
✓ Advantage: Your interest rate is likely to be lower than what you’d get with a home equity loan or HELOC, since a cash-out refi is a primary mortgage and not a second mortgage.
See current refinance rates and top lenders today.
Reverse mortgage
With a typical mortgage, you make payments each month to repay the loan. But 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 available 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 don’t charge any 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.
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 paying 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 time (often as long as 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.
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
A typical time to close on a home equity loan is between two to eight weeks. Every lender operates at its own speed, but the process to underwrite a home equity loan is similar to a standard first mortgage, so you can expect it to take about the same amount of time.
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 need to show that you have enough income from other sources to make your payments.
Having too little equity, poor credit, inconsistent or insufficient income or being underwater on your mortgage are common reasons lenders might turn down a home equity loan application.
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.
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