HELOC Requirements: Minimum Credit Score, Equity and Income Needed
Most home equity line of credit (HELOC) lenders have these basic requirements:
- Debt-to-income ratio: 43% or less
- Credit score: 620 or higher
- Home equity: 15% or more
A HELOC can help you turn some of your home equity into cash, without selling your house. HELOC requirements are typically similar to home equity loan requirements and may have several fees you’ll need to watch out for.
We’ll walk you through how to qualify for a HELOC and decide whether this option for tapping equity is right for you.
The requirements for a HELOC tend to be stricter than those for a typical first mortgage used to buy a house. That’s because they’re second mortgages, which makes them slightly riskier for lenders.
1. Debt-to-income ratio: 43% maximum
To qualify for a HELOC, you’ll likely need a maximum 43% debt-to-income (DTI) ratio once your potential new loan payment is factored in.
Your DTI ratio measures your monthly debt load compared to your monthly income.
To calculate your DTI ratio, you can use LendingTree’s DTI calculator tool. Or, if you want to do the math yourself, you can 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 $300 student loan payment, a $300 car payment and a $1,700 mortgage payment. That means you have a $2,300 monthly debt load. Now, let’s say you earn $6,250 per month.
Your DTI ratio stands at about 37%. If you then take out a HELOC that comes with $200 monthly payments, your DTI will hit 40%.
You can lower your DTI ratio by paying off debt or increasing your income. Remember: Your income needs to be verifiable with documentation like W-2s or pay stubs.
2. Credit score: 620 minimum
In many cases, lenders set a minimum 620 credit score to qualify you for a HELOC or home equity loan — though the limit can be as high as 660 or 680 in some cases. Still, there are some options for a HELOC or home equity loan with bad credit.
How to find your credit score
The easiest way to find your credit score is to use a credit-monitoring service to access your score for free.
LendingTree Spring offers a quick, secure option for you to track your credit score, get tips for how to improve your credit, and more personalized recommendations.
You can also find out your credit score by contacting any of the three major credit bureaus. It’s free to get your score from Experian, Equifax and TransUnion.
The biggest factor in your credit score is your payment history. So if you need to boost your credit score to qualify for a HELOC, focus on making your payments on time, every time.
3. Home equity: 15% minimum
You need to have a minimum amount of equity — typically at least 15% — to qualify for a HELOC or 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. When you add your first mortgage and new home equity loan together, this creates your combined LTV (CLTV), which lenders cap at 80% to 85%.
Ultimately, the more equity you have (the lower your LTV ratio), the more money you can borrow.
You can technically take out an equity-tapping 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 people, it can take five to 10 years to build up 15% equity.
Ready to find how much you could borrow? Use LendingTree’s home equity loan and HELOC calculator today.
You can accelerate the process of building equity by:
- Paying off your mortgage faster than required;
- Making biweekly instead of monthly payments; or
- Refinancing to a shorter loan term.
How can you get a HELOC or home equity loan with less than 15% equity?
Loans for borrowers with less than 15% equity (which would be an LTV ratio above 85%) are sometimes called high-LTV loans. They usually come with a higher interest rate and tougher credit and income requirements.
See current HELOC rates offered by LendingTree partners today.
Are HELOC requirements the same if you renew or extend?
Your original HELOC terms won’t necessarily be preserved when you renew or extend your credit line.
At the end of a HELOC’s draw period, you’re usually required to stop using the credit line and start paying it off.
However, in some cases, you can start a new draw period — if you can pass a review of your finances. You may have to requalify at current rates, pay new closing costs, or accept different terms.
If you’d like to renew or extend your loan, be sure to reach out to your lender at least 90 days before your HELOC’s draw period ends and ask:
- What are the renewal criteria?
- Will my income be re-verified?
- Is a new appraisal required?
- Are there renewal fees?
- Will the interest rate be reset?
Renewal vs. extension: What’s the difference?
The terminology around renewals and extensions can be confusing. Some lenders use the terms interchangeably, while others don’t. What you need to know is that there are two different ways to start a new draw period on your HELOC:
- Keeping the same loan with the same terms. Technically, this is extending the loan. You may be able to keep the same HELOC rate, go through a lighter review of your finances and pay only a small renewal fee.
- Replacing the loan with a new one. Technically, this is a renewal, or a refinance of the existing HELOC. Your loan terms, including interest rate, will be recalculated to fit the current market and you could be required to pay another full round of closing costs.
Takeaways:
- You may qualify for an extension but not a renewal if your income dropped, credit score declined or your home value fell since you originally applied.
- You could trigger termination fees on the old HELOC if you replace your HELOC before the early termination window ends. We’ll dive into the details of HELOC fees next.
How much are HELOC closing costs and fees?
HELOC closing costs and fees are typically in the ballpark of 2% to 5% of the loan amount, though the exact amount varies from lender to lender.
Some lenders advertise HELOCs with no fees, though savvy shoppers should know it’s likely they’re folding those costs into the credit line somewhere.
There are a variety of different fee types to look out for when it comes to HELOCs:
- An application fee when you apply for a HELOC.
- Closing costs typically include fees like origination and appraisal fees. You may also see fees to open the account.
- Inactivity fees can apply if you don’t use the credit line frequently enough or draw a minimum balance.
- Ongoing fees can include annual or “membership” fees.
- Cancellation or early termination fees (also known as prepayment penalties) can kick in if you terminate the HELOC early, though these typically only apply if you cancel within the first several years.
- A conversion fee may come into play if you want to convert a portion of your balance to a fixed interest rate.
- A renewal fee may apply if you choose to renew the credit line, which allows you to enter a new draw period.
Frequently asked questions
Typically, HELOCs and home equity loans have similar requirements. However, the important differences are in how these loans work — for instance, how the funds are accessed, how they’re paid back and the types of interest rates they come with. These differences are worth fully understanding before you choose your best equity-tapping option.
A typical time to close on a home equity line of credit is around six weeks. Every lender operates at its own speed, but the process to underwrite a HELOC is similar to a standard mortgage, so often takes about the same amount of time.
But if you’re looking for quicker funding, the lenders with the fastest HELOC closing times can close on a HELOC in five to seven days.
How much you can borrow will depend on how much home equity you have, your credit score and other factors. A HELOC calculator can help you estimate how much cash you’re likely to access through a HELOC or home equity loan.
To qualify for a HELOC, 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.
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